Industrial production grew at 7.0% YoY in January, matching market expectations and only slightly lower than the one-and-a-half year high of 7.4% achieved in December. Manufacturing output did not lose momentum going into 2015 and was up 6.5% YoY (Dec: 7.9%, 2014: 6.1%). Mining output defied low commodity prices to record a sixth consecutive month of positive YoY growth with help from crude oil production from new offshore fields. Malaysia’s main export, electrical and electronic products, posted growth of 10.3% YoY. In fact, export-oriented industries are growing quicker than domestic-oriented ones as the depreciating ringgit favors exporters over importers. Backed by domestic demand and sustained export growth the economy is on track to record GDP growth of 5.0% in 1Q15.

· The index of industrial production grew at 7.0% YoY in January (Dec: 7.4%), matching the median consensus estimate in market polls but surpassing our 3.3% estimate. The three-month moving average (3mma) of the index was up 6.4% YoY. On a MoM basis, the index saw a contraction (-3.5%, Dec: +4.5%), but this is to be expected as strong growth in the in the previous month set a high base for comparison. The change in the seasonally adjusted index was -1.0% MoM.

· Manufacturing output growth was steady in January at 6.5% YoY, which although lower than the December figure of 7.9%, is higher than the 6.1% average for 2014 and our estimate of 6.0%. The three-month moving average (3mma) for manufacturing output was up 6.1% YoY. On a MoM basis, the measure was down 5.5% from a high base while the change after adjustment for seasonal factors was -2.1%. Manufacturing output represents 65.9% of the IPI.

· Looking at the main manufacturing sub-sectors, Petroleum, Chemical, Rubber & Plastic Products, the largest, was up 5.3% YoY. Electrical and Electronic (E&E) Products, the next most important and the main export earner, was up 10.3%. The other manufacturing sub-sectors posted YoY growth rates of between 6.4% and 11.6% excluding Food, Beverages and Tobacco, which was dragged down by a 9.6% decline in the output of food products.

· Manufacturing sales data released on the same day showed the sales value of the manufacturing sector increased by 2.7% YoY and 1.5% MoM in January to RM57.1b. This was the second consecutive month of rising sales following three consecutive months of decreasing sales.

· Mining activity stayed in positive growth territory in January for the sixth consequtive month, up 8.3% YoY. The numbers surpassed our estimates, which called for a contraction in the sector after an impressive 8.6% expansion in 4Q14. Previously, mining activity grew at an much slower average rate of just 0.8% in 2013 and 2.2% in the first nine months of 2014. The main reason to mining output’s steady rise could largely be attributed to new production of up to 135,000 barrels a day of crude oil from the Gumusut-Kakap offshore field in Sabah waters. Before the new field came on line the average national oil production is in the region of 600,000 barrels a day.

· In the sub mining sector, it came as no surprise that the Extraction of Crude Petroleum Oils & Condensates surged 16.7% YoY. The sub-index has seen double-digit growth since 3Q14 and we take this as an early sign that perhaps the small trade deficit in Petroleum & Petroleum Products would not be replicated in 2015. The sub-index measuring production of natural gas, meanwhile, shrank by 0.6%.

· Electricity output, which has the smallest weightage in the IPI, increased 6.3% YoY in January. In seasonally adjusted terms, however, the increase was just 2.3% MoM

· China’s PMI numbers read together with its widening trade surplus, indicate continued weakness and lack of demand in the world’s second largest economy. China’s trading partners in the region are noticeably worried its waning appetite for imports could affect their own economic growth. This concern was cited as one of the reasons central banks in Thailand and South Korea cut policy rates this week.

Outlook

· Industrial output in January is strong across all three sectors and appears to be well supported by good business operating conditions. However, we expect this to be somewhat disrupted in February due to the extended factory closures in conjunction to the Lunar New Year celebration. The IPI is expected to resume its normal growth trend in March. Nonetheless, this would fall in line with our growth forecast for 1Q15 as we expect it to taper from the stronger-than expected performance in 4Q14 (5.8%). Backed by domestic demand and sustained export growth the economy is on track to record GDP growth of 5.0% in 1Q15.

· Looking forward, we anticipate the depreciation of the ringgit will give export-oriented industries a slight edge over domestic-oriented industries. Output of the domestic-oriented industries would continue to languish for at least two to three quarters following the implementation of the Goods and Services Tax starting in April. Plus, expected weak demand from major trading partners namely China, Asean and the Eurozone this year would put the lid on any upside to export of manufactures going forward. Hence, the overall manufacturing output, which account for about 25.0% of GDP, would continue to slow till at least the 3Q15, weighing down on GDP growth for the large part of 2015. This is in line with our slower GDP forecast of 5.1% for 2015 compared with 6.0% last year. 

Source: Kenanga