OVERVIEW

The Industrial Production Index (IPI) grew 4.9% YoY in August, underperform the consensus and house estimates of 5.4% and 6.7% respectively. A monthly decline of 0.9% in the index further illustrates the overall weakness of domestic industrial output. By category, manufacturing production accelerated to 4.6% YoY in August from 3.3% YoY in July, largely thanks to rising electrical and electronic (E&E) output. On a threemonth moving average (3MMA) basis, manufacturing production registered a higher average growth of 4.2% YoY in August (July: 3.8%). Due to lower crude oil and natural gas mining activities, mining production slowed to 4.3% YoY and declined 7.4% MoM. Electricity production rose above expectation to 11.4% YoY in August. In view of the extended weakness in the mining and manufacturing sector, we maintain our expectation for IPI to moderate to 4.3% in 2016 (2015: 4.5%). Despite the slump in mining production, we believe the recent recovery in oil prices will support a stable contribution to GDP growth from the mining sector. Combined with the latest data suggesting manufacturing sector is likely to hold up in 3Q16, we maintain our full-year GDP growth forecast at 4.3%.

Industrial production growth as measured by the IPI accelerated to 4.9% YoY in August from 4.1% YoY growth in July. However, the yearly growth undershot consensus and house estimate of 5.4% and 6.7% respectively.

On a monthly basis, the IPI declined 0.9% following a 2.2% drop in July. The seasonally adjusted index showed a smaller MoM contraction of 0.5% August compared with a 0.7% decline in the previous month.

The year-to-date IPI growth averaged 3.7% YoY, slower than the 5.1% YoY growth in the corresponding period of last year. This is primarily due to a moderation in manufacturing and mining growth in the respective periods.

Manufacturing output, which accounts for a 65.9% share of the IPI, grew at a quicker pace of 4.6% YoY in August from 3.3% YoY in July, thanks to the accelerating growth in petroleum, chemical, rubber and plastic products as well as E&E output. This is also consistent with the robust performance of domestic E&E exports in August. On a MoM basis, manufacturing output rebounded by 0.8% (July: -3.4%).

On a 3MMA basis, manufacturing output growth quickened to 4.2% YoY from 3.8% in July after staying flat at 3.8% in the previous three months.

The large, export-oriented E&E manufacturing industry grew at a much faster rate of 7.9% YoY in August (July: 4.1%), mainly attributable to rising global demand for electronics components and semiconductor ahead of the year-end holiday season. The petroleum, chemical, rubber and plastic manufacturing industry growth accelerated to 4.5% YoY from 3.5% in July.

In a separate report, manufacturing sales for August dropped 0.6% YoY after declining 3.4% YoY in July. However, it grew 6.9% MoM compared with -6.4% in July.

Mining production (28.9% share of the IPI) experienced a slower growth of 4.3% YoY in August compared with 6.1% YoY increase in July. On a monthly basis, mining output plunged 7.4% as production for both crude oil and natural gas declined.

Electricity output (5.2% share of the IPI) surprisingly surged 11.4% YoY in August (June: 7.1%) to a multi-year high. The year-to-date electricity output growth averaged 9.0% YoY compared with 1.8% in the corresponding period of last year.

The Manufacturing PMI readings among world major economies pointed to a steady growth momentum in the manufacturing sector. The PMI reading for the U.S. improved to 51.5 in August while Japan manufacturing sector returned to expansion mode with a reading of 50.4.

OUTLOOK

Due to weak global economic demand and gloomy Malaysia exports outlook, we expect manufacturing sector to peak in 3Q16 and start to moderate thereafter. We thus see limited upside for industrial production for the remainder of the year. In view of the extended weakness in the mining sector and moderating trend in manufacturing output, we maintain our industrial production growth target of 4.3% for 2016 compared to 4.5% in 2015.

Despite the slump in mining production, we believe the recent recovery in oil prices will support a stable contribution to GDP growth from the mining sector. Combined with the latest data suggesting manufacturing sector is likely to hold up in 3Q16, we maintain our full-year GDP growth forecast at 4.3%

Source: Kenanga Research - 13 Oct 2016