Industrial production expanded 4.3% YoY in June, a slower pace than the 4.5% in May and largely within expectations. The consensus median was expecting slightly faster growth of 4.4% YoY while the house estimate was aiming for slightly less at 4.2%. During the 2Q15 quarter, IPI growth slowed to 4.3% YoY compared to 1Q15 growth of 6.4%, consistent with expectations for modest GDP expansion in 2Q15 on weak external demand and lackluster domestic consumption following the April implementation of the Goods and Services Tax (GST). Manufacturing output, which alone accounts for about two-thirds of the IPI, was up 4.9% YoY in June compared to 3.2% in May led by the export-oriented Electrical & Electronic sector. During 2Q15, manufacturing growth was visibly lower at 4.1% YoY compared to 5.6% in 1Q15. Mining output, which contributes the next largest share of the IPI, grew at an average rate of 7.3% YoY in 1H15 thanks to new production wells added last year. The overall performance of the IPI is supportive of our 2Q15 GDP growth estimate of 4.1%, with some upside bias but well below 1Q15 growth of 5.6%.

• Industrial production as measured by the IPI expanded 4.3% YoY in June, less than the 4.5% growth recorded in May and largely within expectations. Actual numbers were just above house YoY growth estimate of 4.2% and just under the consensus median of 4.4%.
• On a MoM basis, the IPI was down 0.1% in June after a 3.8% increase in May. The seasonally adjusted index recorded an increase of 0.1% MoM.
• The three-month moving average of the IPI, which is less volatile, showed further moderation in industrial production growth to 4.3% YoY in June from 5.2% in May and 6.5% as recently as February.
• During 2Q15 the IPI expanded at a slower rate of 4.3% YoY compared to 6.4% in 1Q15, consistent with expectations for slower GDP growth in the second quarter of the year on weak external demand and the macroeconomic impact of GST implementation. Average growth for 1H15 of 5.3% YoY matched that of 1H14.
• An unexpected rebound in exports helped boost manufacturing output growth to 4.9% YoY in June from 3.2% in May. The large, export-oriented Electrical & Electronic sector saw growth of 6.1% YoY. Over the past four months to May, export-oriented industries have grown at a faster average rate than domestic-oriented industries as the depreciating ringgit has swung the balance in their favour.
• The improvement in manufacturing output was however unable to turn around the moderating growth trend in the three-month moving average of manufacturing output, which grew the slowest in seven months at 4.1% YoY.
• On a MoM basis, manufacturing was up 3.0% in June, adding to a 2.7% expansion in May. The seasonally adjusted increase was 2.5% MoM.
• In a separate report, manufacturing sales for June was up 1.7% YoY to RM54.3b. The biggest increases in sales value was seen in industries involved in the manufacture of basic organic chemicals, diverse electrical capacitors & resistors and consumer electronics
• Mining output continued to stay in positive YoY growth territory in April for the eleventh consecutive month. The typically volitile sector grew 4.0% YoY in June and averaged growth of 7.3% YoY in 1H15 thanks to new production wells added last year.
• Electricity output, which has the smallest weightage in the IPI, shrank 2.4% YoY, its first contraction since February 2013. Meanwhile, its averaged growth in 1H15 is 2.2% YoY compared with 4.6% in 1H14.

Outlook

• Slowing global demand and a delayed recovery from the one-off macroeconomic impact of GST implementation is expected to lead to IPI growth moderating over the next few months to average 4.6% for the full year. This is reflective of slowing GDP growth which we forecast at 5.1% for 2015, down from 6.0% in 2014.

Source: Kenanga Research - 11 Aug 2015