OVERVIEW

• Below expectations. IPI grew by a slower 4.2% YoY (Mar: 4.6%), falling below both Bloomberg’s median consensus forecast and the house forecast of 4.8% and 4.9% respectively. On a MoM basis, the IPI fell by 5.4% (Feb: +11.0%)
• Resilient manufacturing sector. The manufacturing sector grew 6.7% (Mar: 5.9%), buoyed by continued strength in the E&E segment with the expansion in the food, beverage and tobacco providing an additional push to the manufacturing sector.
• Mining sector declines. The mining sector fell 2.0% YoY, its first decline in seven months as the slower growth in the natural gas segment was overwhelmed by weaknesses in crude oil segment.
• Moderating growth ahead. With May’s PMI biased on the downside and the mining sector unlikely to see an uptick in the near term, we believe that this may translate into a moderation in growth from 2Q17 onwards as the manufacturing sector may have peaked. Along with the diminishing base effect, we expect GDP growth to moderate to 5.4% from 5.6% in the 1Q17. Our full year GDP forecast is 5.2%, reflecting a moderate growth trajectory in the 2H17.

Below expectations. IPI grew by just 4.2% (Mar: 4.6%), underperforming relative to Bloomberg’s median consensus forecast of 4.8% (ranging from 4.0-7.2%) and the house forecast of 4.9%. The IPI was likewise down on a MoM basis, falling 5.4% (Feb: +11.0%), in part from seasonal fluctuations. On a seasonally-adjusted basis, the IPI was relatively flat, declining by just 0.1% MoM (Mar: -0.7%). IPI growth was largely sustained by the strengthening manufacturing sector though weaknesses in the mining sector were a drag to headline IPI.

Strengthening manufacturing sector. Nevertheless, the manufacturing sector saw its highest growth since January 2015 with an expansion of 6.7% (Mar: 5.9%). On a MoM basis, however, the manufacturing sector declined 4.1%, though this is par for the cause of April’s seasonality, especially after an 11.6% surge in March. After seasonal adjustment, the IPI reading was cheerier, growing 0.5% MoM (Mar: -0.4%).

E&E strength supported by the F&B sub-sector. Manufacturing sector growth were broad-based with the electrical and electronic (E&E) sub-sector growing 9.7% (Mar: 8.5%), its fastest clip in 18 months. This was further supplemented by a rebound in the food, beverages and tobacco subsector (F&B) which grew 15.4% (Feb: 5.6%), close to January’s 16.0% growth. Combined, the E&E and F&B sub-sector accounted for 4.3 ppt of manufacturing sector growth, picking up some of the slack arising from moderating growth in the petroleum, chemical, rubber and plastic product subsector.

Manufacturing sales continues to grow. In a separate report, manufacturing sector sales sustained its double-digit growth, expanding 15.6% in April (Mar: 13.6%), extending its double-digit growth streak for the fifth month running and eighth straight month of increase. In MoM terms, manufacturing sales fell 8.2% (Mar: +10.9%) though after seasonal adjustments, manufacturing sales expanded 0.9% MoM (Mar: -2.1%). Like the previous month, growth in manufacturing sales were largely attributed to increased sales for refined petroleum products, electrical capacitors, resistors, circuit boards and display, with some additional support from the sale of organic chemicals & inorganic compound .

Mining sector a drag on growth. Mining sector production fell 2.0% YoY (Mar: +2.0%), the sector’s first YoY contraction after six consecutive months of growth starting October 2016. Decline in the mining sector came as the growth in natural gas index moderated to 4.0% (Mar: 7.9%) while crude petroleum production saw a sharper fall of 6.6% (Mar: -2.6%). This ultimately led to a drag in headline IPI despite the stellar growth in the manufacturing sector.

Electricity index declines. Electricity output fell by a sharper 1.5% (Feb: -0.2%). In MoM terms, the electricity index was down 2.5% (Feb: +12.4%). After seasonal adjustment, the index grew 0.2% (Mar: -2.7%).

OUTLOOK

Weaknesses in mining sector to continue. As anticipated in our prior report, we remain overall bearish on mining sector’s prospects, given Malaysia’s participation in OPEC’s voluntary oil production cut and especially given the extension of its cuts by nine months. As such, any improvements in the IPI may hinge on sustained manufacturing sector growth narrative.

An overcast outlook. April’s IPI figures was somewhat consistent with April’s PMI rosier estimates of 50.7 points, its first reading above 50.0 mark since March 2015 though ultimately, weaknesses in the mining sector overshadowed the record high manufacturing sector performance – PMI is largely more specific with manufacturing sector performance. With May’s PMI reading falling back below the 50.0 threshold at 48.7 points, we are concerned if this may portend further deterioration in the IPI as manufacturing sector activity may no longer sustain deterioration in mining sector output. However, at present, it is too early to see if April’s numbers represent a turning point from a more optimistic industrial production or if these numbers are simply an aberration to the trend. Globally, the PMI reading were largely stable at 52.6 (Apr: 52.7) with Europe’s PMI advancing slightly to 57.0 (Apr: 56.7) though the PMI reading for the US fell below the 50.0 threshold to 49.6 (Apr: 50.3).

Mixed trend across the region. The moderation in Malaysia’s May PMI was largely consistent with that of the region with most countries, save Philippines, seeing a decline in the PMI reading though none of these countries crossed the 50.0 threshold (Thailand was already in the sub-50.0 territories since April). While we remain overall positive on the ASEAN regional upturn, we believe that the deterioration in PMI may suggest that growth may have peaked and likely to moderate from 2Q17 onwards.

Growth narrative intact. Notwithstanding April’s numbers, with an upbeat manufacturing sector, we believe that this may not necessarily translate into a significant downturn to Malaysia’s growth narrative. While the mining sector account for approximately 28.92% of the headline IPI, it remains a relatively small proportion of headline GDP. Indeed, the mining sector contribution have steadily accounted for a smaller proportion of GDP in recent years from 10.9% share in 2010 to around 8.8% currently. On the possibility that manufacturing sector growth may have peaked in 1Q17, along with the diminishing base effect, we believe that this justifies our forecast of 5.4% for 2Q17 (1Q17: 5.6%), Our full year GDP forecast is 5.2%, reflecting a moderate growth trajectory in the 2H17.

Source: Kenanga Research - 13 Jun 2017