The Industrial Production Index (IPI) expanded 3.0% YoY in August, less than consensus and house estimates due to lower external demand for manufactured goods and an unexpected 3.4% YoY contraction in mining output, the first month of negative growth for the volatile sector in 13 months. Manufacturing output and electricity generation did not face the same slump. Manufacturing grew slightly more than expectations, up 4.3% YoY (July: 4.2%). The much smaller electricity sector rebounded 15.9% YoY in August, more than making up for a two month contraction in June-July. Despite the latest seasonally-adjusted manufacturing output showing a higher growth rate, the sector is increasingly wrought in uncertainty as global manufactured demand is weakening as it enters the 2H15. Though it may not appear as prevailing in 3Q15 the uncertainty is expected to be more pronounced in 4Q15. Hence, we are projecting GDP growth to range between 5.0% and 5.3% for 2015.

• Industrial production as measured by the IPI expanded 3.0% YoY in August, a sharp deceleration from July growth of 6.1% YoY. Consensus and house expectations were 4.1% and 3.9% growth respectively.
• On a MoM basis, the IPI was down 1.0% in August compared to -1.1% (revised from -1.2%) in July. The seasonally adjusted index fell 0.9% MoM. Meanwhile, growth in the three-month moving average (3mma) of the IPI slowed to 4.5% YoY (July: 5.0%).
• Accounting for about two-thirds of the IPI (65.89%), August manufacturing output growth edged up to 4.3% YoY from 4.2% in July beating our estimate of 3.9% growth.
• On a MoM basis, manufacturing fell 0.5% albeit smaller compared to a 2.1% fall in July after a 3.0% increase in June. After seasonal adjustment, manufacturing output showed a MoM increase of 1.9% for August. On a 3mma basis, manufacturing output expanded 4.5% YoY from 4.1% in July.
• The large, export-oriented Electrical & Electronic Products sub-sector grew at a faster pace of 11.7% YoY (July: 7.2%) despite latest data showing a 3.0% YoY decline in global semiconductor shipments in August. Other main manufacturing sub-sectors showed lackluster growth.
• In a separate report, manufacturing sales for August grew 3.9% MoM and 0.8% YoY to RM56.2b. The biggest increase in sales value was seen in the manufacture of electrical capacitors and resistors and the manufacture of consumer electronics, probably due to currency translation gains from the sharply weaker ringgit in August (-8.9%).
• The typically volatile mining sector posted the first negative YoY growth in 13 months, contracting 3.4% YoY. The fall in mining output was unexpected, even after accounting for a high-base effect from a production boost in late-2014 as oil & gas export volumes have not fallen drastically.
• Electricity output, which has the smallest weightage in the IPI (5.19%), jumped 15.9% YoY on a 15.5% MoM surge which more than made up for contractions in the preceding two months.

Outlook

• Slowing demand in regional and major export markets is expected to lead to manufacturing output growth moderating over the next few months to average 3.7% YoY for 2H15. This would imply full-year growth of 4.3%, down from 6.1% in 2014.
• Global PMI, a leading indicator of factory activity, inched closer to the 50 point level that separates expansion from contraction with a reading of 50.6 in September. Worryingly, the China PMI published by Markit has stayed in contraction territory for seven consecutive months. Across Asia, business sentiment is worsening. Readings for Malaysia, Indonesia, and Singapore are also in negative territory. This supports our view that manufacturing output growth will gradually weaken towards the end of the year.
• The combined July and August manufacturing data would suffice to indicate that GDP growth in 3Q15 could possibly surpass 2Q15 (4.9%). Combined with services and construction growth we reckon it could still meet our growth estimate of 5.1% in 3Q15. Our concern is with the possibility of continued deceleration of external demand in the 4Q15. If that happens it may fall short of our GDP growth forecast of 5.5% in 4Q15. Taking this into consideration, we have included a lower bound in our 4Q15 GDP growth forecast at 4.9% while maintaining 5.5% at the upper range. Due to the growing uncertainty we project GDP growth for the whole of 2015 to range between 5.0% and 5.3%.

Source: Kenanga Research - 13 Oct 2015