The Industrial Production Index (IPI) expanded 2.7% YoY in December, more than the 1.8% YoY expansion in November and consensus estimate of 1.0% YoY. Despite better than expected growth, the headline rate remained well below the long-term average. Industrial production grew just 2.9% YoY in 4Q15, the lowest in nearly three years. The 2015 average growth rate was 4.5%, below the 5.1% achieved in 2014, mostly due to moderating growth in manufacturing output, which makes up two-thirds of the IPI. In 2015, manufacturing output growth slowed to 4.8% from 6.1% in 2014. For December alone, manufacturing output grew at the slowest in 10 months (4.0% YoY) while mining output shrank 1.5% YoY. Overall, full year growth in the IPI and manufacturing output was not far off from expectations ( 0.1 percentage point) and the 4Q15 performance of the IPI supports our estimate for slower GDP growth of 4.2% YoY in 4Q15 compared to 4.7% YoY in 3Q15. With the moderating trend likely to persist into 2016, we are forecasting the IPI to expand by a smaller 4.3% in 2016, backed by an equally slower manufacturing output growth of 4.5%.

• Industrial production as measured by the IPI expanded 2.7% YoY in December, bettering the 1.8% YoY expansion in November and the consensus and house estimates of 1.0% and 1.2% respectively.
• On a MoM basis, the IPI was up 5.4% in December after a 4.6% fall in November. The seasonally adjusted index was up 2.8% MoM. Despite the improvement, the December headline rate remained well below the long-term average and there was no sign of a break in the moderating growth trend.
• Over the 4Q15 quarter, the IPI grew by just 2.9% YoY, the lowest rate since 1Q13 or nearly 3 years. The 2015 average growth rate was 4.5%, below the 5.1% achieved in 2014, mostly due to moderating growth in manufacturing output, which makes up a sizable two-thirds of the IPI.
• Weakness in the two main components of the IPI, manufacturing and mining persisted in December. Manufacturing output growth slowed slightly to 4.0% YoY in December for the second month of decelerating growth. Mining production was down 1.5% YoY, its third straight month of contraction.
• Accounting for the largest share of the IPI (65.9%), manufacturing output growth moderated to a 10-month low of 4.0% YoY in December from 4.1% in November. On a MoM basis, manufacturing output rebounded 5.7% (Nov: -6.1%), slightly more than what the market expected. The increase was 3.6% MoM after seasonal adjustment.
• Production volume in the large, export-oriented E&E manufacturing industry continued to expand in December but at a slower rate of 8.6% YoY compared to 9.3% YoY in November. Growth in Non-metallic Mineral, Basic Metal and Fabricated Metal Products was 5.0% YoY (November: 4.3%). The other sub-sectors showed lacklustre growth.
• The performance of Malaysia’s manufacturing sectors mirrors that of major industrial economies. Manufacturing
  Purchasing Managers’ Index (PMI) readings for the U.S. and China stayed in contraction territory in December, with the U.S. recently dipping below the 50 point mark. Alternately, readings for Japan and the Eurozone are plateauing.
• In a separate report, manufacturing sales for December was down 1.2% YoY to RM55.6b. The decrease was led by a sharp 40.5% YoY drop in the sales value of refined petroleum products
• Mining production fell 1.5% YoY in December following a 4.1% YoY fall in November. Over the 4Q15 quarter, mining output shrank 2.4% YoY by volume, mainly due to a high base effect of the October 2014 jump in production.
• Electricity output, which has the smallest weightage in the IPI (5.2%), was up 5.6% YoY in December compared to 2.0% in November. Average growth in 2015 of 2.4% was much lower than 4.7% in 2014, possibly tied to slowing economic growth.

Source: Kenanga Research - 12 Feb 2016