OVERVIEW

• The Industrial Production Index (IPI) growth moderated to 3.2% YoY in September (August: 4.9%), slightly below the market estimates of 3.3% YoY. However, the index registered a 2.0% MoM growth in September.
• By category, manufacturing production slowed to 4.0% YoY from 4.6% YoY in August, mainly attributable to softer chemical products and electrical and electronic (E&E) output growth. Mining production edged down 0.1% YoY on declining petroleum extraction activities. Electricity production rose 7.1% YoY for the month.
• Along with an expectation of weak mining output, we expect growth moderation in manufacturing output to weigh on overall IPI growth in 4Q16. Hence, we are revising down our 4Q16 GDP forecast to 4.3% from 4.7%.
• However, we still maintain our view that GDP growth in the 2H16 would be higher, which is projected at 4.3% versus 4.1% in the 1H16. Though our GDP growth forecast for the whole of 2016 would be adjusted slightly lower to 4.2% from 4.3%, it is within the forecast range of 4.0% to 4.5%.

Industrial production growth as measured by the IPI moderated to 3.2% YoY in September from 4.9% YoY in August. The yearly growth was just a tad lower than the market estimates of 3.3% YoY. On a monthly basis, the IPI rose 2.0% in September, a month that typically saw a positive month-on-month growth. After seasonal adjustment, the IPI actually fell 0.1% MoM in September. On a quarterly basis, the IPI grew faster at 4.0% YoY in 3Q16 compared with 3.7% YoY in Q2. The year-to-date IPI growth averaged 3.7% YoY, slower than the 5.1% YoY recorded in the corresponding period of last year. This was largely attributed to the slower output in both manufacturing and mining sectors.

Manufacturing output, which accounts for a 65.9% share of the IPI, grew at a slower pace of 4.0% YoY in September from 4.6% YoY in August. This is mainly due to slower growth in chemical, rubber and plastic products as well as E&E output in September. On a monthly basis, manufacturing output increased 2.8% in September (August: 0.8%).

The large, export-oriented E&E sub-sector’s output growth moderated to 6.5% YoY in September from 7.9% YoY in August. The moderation in E&E output was in line with the weaker E&E exports performance in September, as the seasonal increase in demand before year end festivities starts to diminish. Similarly, growth of the petroleum, chemical, rubber and plastic production inched lower to 4.4% YoY from 4.5% in August.

In a separate report, manufacturing sales value for September rebounded 1.1% YoY after two consecutive months of decline. This is largely supported by 5.8% MoM expansion.

Mining production (28.9% share of the IPI) edged down 0.1% YoY in September. The weak performance was primarily due to a 2.3% YoY decline in crude petroleum extraction activity, which offset a 2.6% yearly increase in natural gas production. On a monthly basis, mining output rose 1.3% as natural gas registered a 6.1% monthly production growth. On a quarterly basis, mining output expanded 3.4% YoY in 3Q16 from 1.9% in 2Q16.

Electricity output (5.2% share of the IPI) moderated to 7.1% YoY from 11.4% YoY in August. The year-to-date electricity output growth averaged 8.8% YoY compared with 1.9% in the corresponding period of last year.

The Manufacturing PMI readings among world major economies indicate an increasingly credible recovery momentum in the manufacturing sector. The PMI reading for the U.S. rose to 51.9 in September while Japan manufacturing sector stayed in expansion mode for the second month with a reading of 51.4.

OUTLOOK

A weaker 4Q16 IPI outlook. The accelerated IPI growth of 4.0% YoY in third quarter (2Q16: 3.7%) is consistent with the improved 3Q16 GDP result (4.3%). Going forward, we expect a dimmer outlook for industrial production in 4Q16. The demand for E&E products is likely to shrink after its seasonal peak in 3Q16. In line with weak external demand amidst uncertain economic conditions in regional economies, manufacturing sector growth is likely to moderate to 3.5% in 4Q16 from 4.0% in 3Q16. Along with an expectation of weak mining output, we expect growth moderation in manufacturing output to weigh on the overall IPI growth in 4Q16.

Full-year GDP to hold up well. Although private consumption has been resilient thus far and is expected to partly offset the weakness in external demand in 4Q16, the expectation of a moderation in manufacturing production will inevitably pose a downside risk to the GDP outlook in 4Q16. Hence, we are revising down our 4Q16 GDP forecast to 4.3% from 4.7%. However, we still maintain our view that GDP growth in the 2H16 would be higher, which is projected at 4.3% versus 4.1% in the 1H16. Though our GDP growth forecast for the whole of 2016 would be adjusted slightly lower to 4.2% from 4.3%, it is within the forecast range of 4.0% to 4.5%

Source: Kenanga Research - 14 Nov 2016