• June’s IPI clocks a slower growth. The Malaysian Industrial Production Index grew by a slower 4.0% YoY (May: 4.6%), outperforming the consensus estimates of 3.0% and the house forecast of 2.9%. On a MoM basis, IPI likewise grew by a slower 1.7%, (May: 4.1%). June’s numbers brings 2Q17 IPI growth at a modest 4.2% (1Q17: 4.3%).
• Manufacturing sector growth eases. Manufacturing sector growth eased to 4.7% (May: 7.2%) though the manufacturing sector continued to enjoy largely broad-based growth with the E&E subsector driving growth. June’s manufacturing IPI brings 2Q17 manufacturing index growth to a faster clip of 6.2% (1Q17: 5.6%; 2016: 4.3%)
• Mining sector’s uptick. Mining sector grew 2.4% (May: -2.3%) as hinted by IEA’ s report of higher oil production in Malaysia. This helped cushion the contraction in the mining sector observed during April-May, culminating in the mining index falling by a more subdued 0.6% (1Q17: 1.2%; 2016: 1.7%).
• Likely positive manufacturing sector contribution to headline GDP. Despite the more moderate numbers reflected in June’s IPI, we are overall positive on the strong quarterly growth in the manufacturing sector, possibly lending some support to the 2Q17 GDP figures (to be released next week). We are reiterating our 2Q17 GDP growth forecast at 5.4% (1Q17: 5.6%).

IPI moderates but beats expectation. IPI grew by 4.0% (May: 4.6%), its slowest pace in five months. However, this outperformed Bloomberg’s median consensus estimates of 3.0% (ranging from 1.0-4.5%) and the house estimate of 2.9%. June’s IPI was likewise slower on a MoM basis, rising by a more moderate 1.7% (May: 4.1%). While this coincides with the Ramadan fasting month, the seasonality adjusted index saw a similar 1.9% MoM growth (May: 0.6%) implying a relatively low seasonal impact. June’s numbers rounds off 2Q17 IPI growth at a stable 4.3% YoY (1Q17: 4.3%), with a stronger manufacturing sector weighed down by the continued weakness in the mining sector during the period.

Manufacturing sector’s June lull. The manufacturing sector expanded by a solid 4.7%, coming off its 29 month high of 7.2% during the previous month and also representing a moderation from its prior four months of above-5% growth rates. On a MoM basis, manufacturing output was likewise slower at 1.5% (May: 3.6%); post-seasonal adjustment, the manufacturing sector was likewise slower with a 0.1% growth (May: 0.2%). June’s numbers rounds up manufacturing sector growth to 6.2% (1Q17: 5.6%; 2016: 4.3%).

Largely broad-based growth in the manufacturing sector. Despite the moderation in the manufacturing sector, most of the manufacturing subsectors continued to demonstrate growth, albeit at a slower pace, with the exception of the Transport Equipment and Other Manufactures sub-segment (which declined 1.0% YoY (May: +6.9%)). The electrical and electronic subsector (E&E) continued to be the driver of manufacturing sector growth, expanding by 8.3% (May: 11.6%), contributing to an estimated 2.4 percentage points (ppts) or more than half of manufacturing sector growth. This came after May’s strong E&E sector performance, which saw its fastest expansion in 19 months since November 2015. Manufacturing sector growth was further supported by the petroleum, chemical, rubber and plastic subsector, the food, beverages & tobacco subsector and the non-metallic, mineral, basic and fabricated metal subsector which grew by 2.8%, 6.7% and 4.2% respectively (May: 3.1%, 12.9% and 4.4% respectively).

Manufacturing sector sales took a breather. Separately, manufacturing sector sales likewise moderated, though still growing by a modest 11.5% (May: 19.5%), easing from its record high since the inception of the Malaysia Standard Industrial Classification (MSIC) 2008 YoY series starting January 2014. However, June’s manufacturing sales extends its growth streak to the tenth consecutive month since September 2016. This culminated in total manufacturing sales of MYR62.3b (May: MYR61.9b). On a MoM basis, sales value expanded 0.5% (May: 2.4%) though post-seasonal adjustment, sales value declined 2.9% (May: +2.4%), likely after adjusting out the impact of Eid-ul-Fitr. Higher YoY sales growth was driven mainly by the sale of refined petroleum products and electrical capacitor, resistor, circuit board and display product.

Mining sector improves slightly. Mining segment production recorded a 2.4% YoY gain (May: -2.3%) after falling for two consecutive months since April. This came as crude petroleum production recorded a mild growth of 0.8% (May: -5.4%) after its sub-index deteriorated for the fifth consecutive month in May. At the same time, natural gas mining grew by a faster clip of 4.4%; previously, natural gas production has been moderating for two consecutive months. The increase in oil production despite Malaysia’s participation in OPEC’s voluntary oil production cut is consistent with reports by the International Energy Agency’s (IEA) August report of Malaysia boosting oil production somewhat during the last few months. Overall, June’s more bullish numbers were insufficient to mitigate mining sector’s poorer performance in April-May, resulting in the 2Q17 mining index declining by 0.6% (1Q17: +1.2%; 2016: +1.7%). On a MoM basis, mining sector production expanded by 2.4% (May: -2.3%) though after seasonal adjustment, the growth was sharper at 8.2% (May: +0.9%)

Electricity index rises again. Electricity output increased by 2.1% YoY (May: 2.5%). In MoM terms, the index slipped by 4.6%, likely due to seasonal factors. Post-seasonal adjustments, the index declined by a mellower 1.4% (May: +3.3%).

OUTLOOK

Bullish on manufacturing growth. While June’s IPI rounds off 2Q17 IPI with a 4.3% growth (1Q17: 4.3%; 2016: 3.8%), the differing growth rates of the industrial subsectors are of interest. The manufacturing IPI, in particular, grew by a faster 6.2% in 2Q17 above 1Q17’s 5.6%, suggesting some upside to the manufacturing sector contribution to gross domestic product (GDP). These bullish overtones will be supported by the narrative of strong E&E sector driving manufacturing sector growth, a common thread in our assessment of manufacturing IPI growth over the past three months. This narrative will be further sustained by stable-to-expanding technology-related manufactures and trade. For now, we expect 2Q17 to be clocked at 5.4%, a slight taper from 5.6% growth during 1Q17.

Mining sector weakness likely to stay. On the mining sector, while its IPI expanded in June, the overall pessimistic tone suggests that mining sector contribution to GDP will likely be weak moving into 2Q17. We reiterate our pessimism on continued mining sector weakness moving into 3Q17 though we note that the IEA report suggesting an uptick in oil production from Malaysia suggests that mining sector weakness may be less severe than previously anticipated. Indeed, we may expect some expansion in mining sector growth early 3Q17.

Sanguine global outlook; pessimistic regional outlook. Globally, the Global PMI was slightly more optimistic at 52.7 (June: 52.6) with many major economies likewise reporting above 50.0 reading. This includes the Eurozone (Jul: 56.8; Jun: 57.4), the United States (Jul: 53.2; Jun: 52.0), China (Jul: 51.1; Jun: 50.4) and Japan (Jul: 52.1; Jun: 52.4). However, closer to home, PMI assessment among the ASEAN region (including Malaysia) is significantly more bearish. The ASEAN PMI sank to its lowest reading in 9 months and recorded its first sub-50 reading since 2017 with a reading of 49.3 (Jun: 50.0). However, we remain bullish on the narrative of synchronous global growth and hence, we believe that stronger global growth may eventually feed into a more positive story for ASEAN’s prospects moving forward.

Source: Kenanga Research - 11 Aug 2017