• Picking up after April’s lull. The Malaysian Industrial Production Index grew at a faster pace of 4.6% YoY (Apr: 4.2%), above Bloomberg’s median consensus forecast of 4.1% and just a notch above the house forecast of 4.5% respectively. On a MoM basis, IPI grew by 4.1% (Apr: -5.4%).
• E&E drives manufacturing growth to 29-month high. Strong expansion in the E&E segment helped push manufacturing production growth to 7.3% YoY, its highest growth since January 2015. On a MoM basis, the manufacturing sector grew by 3.6% (Apr: -4.1%).
• Mining sector continues to be a drag. The mining sector remained weak, declining by a quicker 2.3% YoY (Apr: -2.0%), as the decline in crude oil production continued to weigh against the index.
• Cautiously optimistic on sustained 2Q17 growth. May’s IPI results defied trends in May’s PMI survey which saw the index falling below the 50.0 threshold to 48.7 (Apr: 50.7). This suggests that the growth momentum observed in 1Q17 may yet be sustained beyond 2Q17 as E&E growth remains undiminished. For now, we are maintaining our 2Q17 GDP growth forecast at 5.4% (1Q17: 5.6%) though with a mild upward bias, in consideration of further E&E expansion.

IPI expands above expectation. IPI grew by a faster 4.6% (Apr: 4.2%), beating Bloomberg’s median consensus forecast of 4.1% (ranging from 3.2-5.0%) and was just a notch above the house estimate of 4.5%. IPI rebounded by 4.1% MoM after shrinking 5.4% during April. While stronger May figures are typically influenced by seasonality, postseasonal adjustment, IPI also expanded, albeit by a lower 0.7%. May’s IPI growth occurred as the manufacturing sector continued to see speedier growth, despite continued weaknesses in the mining sector.

Manufacturing sector’s continued expansion. The manufacturing sector continued to strengthen, expanding 7.3% (Apr: 6.7%) and hitting a 29 months high growth since January 2015. On a MoM basis, manufacturing output rebounded by 3.6% (Apr: -4.1%), consistent with May’s seasonal uptick. After seasonal adjustment, the sector clocked a lower 0.2% MoM growth (Apr: 0.5%).

Broad based manufacturing growth, led by E&E. Manufacturing sector growth continued to be broad-based across key manufacturing categories for the fourth consecutive month. The electrical and electronic (E&E) sector remained the largest contributor to headline manufacturing IPI growth, expanding by a faster 11.6% (Apr: 9.7%). This was the fastest expansion of the E&E segment in 19 months since November 2015, and likewise the first time it hit double digit growth. This translates to a 3.3 ppt growth contribution towards manufacturing IPI. Manufacturing sector growth were further supplemented by sustained strength in the food, beverage and tobacco (F&B) segment along with the petroleum, chemical, rubber and plastic product (PC) category which grew 12.9% (Apr: 15.5%) and 3.1% (Apr: 3.0%) respectively.

Manufacturing sales growing from strength to strength. Separately, manufacturing sector sales grew 19.5% YoY (Apr: 15.6%), hitting a record high since the inception of the Malaysia Standard Industrial Classification (MSIC) 2008 YoY series starting January 2014 and extending its growth streak for the ninth month running. This culminates in total manufacturing sales of RM61.9b. In MoM terms, manufacturing sales rose by 2.4% after a sharp seasonal decline of 8.2% MoM in April. Post-seasonal adjustment, MoM sales growth was higher at 2.6%. Higher YoY sales were driven by refined petroleum product, electrical capacitors, resistors, circuit boards and display.

Continued mining sector weakness. Mining sector production declined by 2.3% YoY (Apr: -2.0%), its second YoY contraction after growing for six consecutive months from October 2016. As per the previous month, continually flat growth of the natural gas index – which expanded at a slower 1.4% (Apr: 4.1%; Mar: 7.8%) – failed to mitigate the continuously contracting crude petroleum production. The crude petroleum index fell 5.4% (Apr: -6.6%). As discussed in our previous report, this is likely to persist given Malaysia’s commitment to OPEC’s voluntary oil production cut.

Electricity index rises after two months of contraction. Electricity output rebounded by 2.5% YoY after declining in the preceding two months (Apr: -1.5%, March: -0.2%). In MoM terms, the electricity index rose 5.7% (Apr: -2.5%). After seasonal adjustment, electricity output rose by a more modest 3.3% MoM (Apr: +0.2%).

OUTLOOK

Persistent mining sector weaknesses. Our assessment on the mining sector remains essentially unchanged given the time horizon of Malaysia’s participation in OPEC’s voluntary oil production cut, extending to March 2018. With trends suggesting that growth in natural gas mining may have flattened, we believe that the mining index may see continued, if not sharper, deterioration moving forward.

Sanguine on manufacturing strength. May’s IPI suggests that manufacturing sector strength remains overall intact, at least in the next three to six months. Combined with April’s strong manufacturing IPI – notwithstanding mining IPI – there are signs that the manufacturing growth momentum that we observed in 1Q17 may persist into 2Q17, possibly longer. Along with signs from May’s external trade pointing to strong E&E growth, signs are increasingly pointing towards a resilient rebound from technology-related manufactures and trade. This, in turn, may lead to a more vibrant 2Q17 projection. For now, however, we are maintaining our present estimate of a 5.4% for 2Q17 GDP growth, with some upside arising from the E&E and auxiliary sectors.

Divergence of sentiments and fundamentals? May’s IPI was a surprise on the upside given the May’s PMI which foretold a weaker manufacturing sector. Malaysia’s May manufacturing PMI fell to 48.7 points, below the 50.0 threshold, after rising to 50.7 points in March (its first in 27 months). While it remains too early to draw conclusions from this disconnect, in tandem with strong external trade data and strong global growth, we hypothesise that this may reflect strong external demand propping up the manufacturing sector, despite a relatively shaky domestic demand narrative. This suggests that Malaysia’s manufacturing sectors’ fortunes may be more closely tied to global growth.

Sanguine global outlook amid lacklustre ASEAN outlook. Globally, June’s PMI remained well above the 50.0 threshold at 52.6 (May: 52.6). Other major economies likewise reported above 50.0 reading in June, albeit receding slightly. These major economies include the Eurozone (Jun: 57.3; May: 57.0), US (Jun: 52.0; May: 52.7), China (Jun: 50.4; May: 49.6) and Japan (Jun: 52.4; May: 53.1). However, back in the region, ASEAN economies reported a PMI reading of 50.0 (May: 50.5). Apart from Malaysia (46.9), Indonesia (49.5) and Myanmar (49.4), four out of the seven ASEAN economies reported reading above 50.0. Philippines remained the strongest performing ASEAN economy with a reading of 53.9 followed by Vietnam (52.5), Thailand (50.4) and Singapore (50.3).

Source: Kenanga Research - 13 Jul 2017