OVERVIEW

• July’s IPI growth speeds up. The Industrial Production Index grew by a significantly higher 6.1% in July (Jun: 4.0%). This beat both the consensus estimates and the house estimates of 5.1% and 4.7% respectively. On a MoM basis, IPI declined slightly by 0.3% (Jun: +1.8%) though after seasonal adjustment, IPI grew by 1.3% (Jun: 1.9%).
• Balanced manufacturing growth led by E&E. The manufacturing sector clocked a growth of 8.0% (Jun: 4.7%) with the primary growth driver being the E&E subsector. However, the manufacturing sector saw stronger support from other non-E&E subsectors including the food and beverages subsector and petrol chemical subsector.
• Mining sector avoids contraction. The mining sector was mostly flat with a growth of 0.2% (Jun: 2.4%) as lower crude oil production were somewhat mitigated by the continued acceleration of natural gas production.
• Upward tilt to GDP growth. July’s industrial production number confirms the overall optimism which we observed in the external trade numbers, marking an auspicious start to 3Q17. We estimate the full year growth for 2017 at 5.4% with 3Q17 growth at 5.3% (2Q17: 5.8%). Continued strength in production and trade numbers may prompt an upward revision of these forecasts.

IPI grows at an 8-month high. The IPI grew by 6.1% in July after a sluggish June growth of 4.0%. This was its fastest growth rate in eight months and outperformed both Bloomberg’s median consensus estimates of 5.1% (4.0-6.9%) and the house estimate of 4.7%. However, in MoM terms, the IPI declined by a marginal 0.3% (Jun: +1.7%) – post-seasonal adjustment, IPI grew by 1.3% MoM though it fell below June’s IPI growth of 1.9%. Overall, growth in July’s IPI was largely a function of stronger manufacturing sector growth amid a nearly flat mining sector expansion.

Strong manufacturing sector growth. The manufacturing sector grew by 8.0% after a modest 4.7% growth in June. Manufacturing sector growth zoomed to its highest point in 37 months, picking up from May’s prior 29-month high growth of 7.2%. On a MoM basis, manufacturing sector growth was slightly down by 0.3% (Jun: 1.5%) though after seasonal adjustment, manufacturing output expanded by a faster 1.4% (Jun: +0.1%).

Manufacturing sector growth spread out among subsectors. Manufacturing sector-growth remained broad-based overall with the electrical and electronic (E&E) sector continuing to be a key driver of manufacturing growth. The production by the E&E sector expanded by 10.5% (Jun: 8.3%) contributing to 3.0 percentage points (ppts) to manufacturing sector growth. Furthermore, the manufacturing sector enjoyed broadbased support among all manufacturing sub-sectors including the transportation equipment (TE) subsector which recorded a 6.8% growth after a 1.0% decline in June. Food and beverage and tobacco (F&B) sector expanded by 19.2% (Jun: 6.7%) while the petroleum, chemical, rubber and plastic product (PC) and the nonmetallic mineral, basic & fabricated metal product (NM) accelerated by a faster 3.9% and 7.6% respectively (Jun: 2.8% and 4.1% respectively). A notable feature of July’s growth is the greater contribution by the non-E&E subsectors which previously played a more supportive role to headline manufacturing sector growth. The F&B, PC and NM subsectors contributed to 1.9 ppts (Jun: 0.7 ppts), 1.4 ppts (Jun: 1.0 ppt) and 0.9 ppts (0.5 ppt) to manufacturing sector growth respectively.

Manufacturing sales likewise picking up. July’s rosier manufacturing production numbers were likewise reflected by manufacturing sector sales growth which accelerated to a whopping 22.2% (June: 11.5%). This was the highest growth observed based on the Malaysia Standard Industrial Classification (MSIC) 2008 series (which began in January 2014), breaking the previous record high growth of 19.5% achieved in May 2017 while extending the manufacturing sales growth streak to its eleventh consecutive month of growth since September 2016. Growth in manufacturing sales were a result of higher sales in electrical and electronic components (including capacitors, resistors, circuit boards, transistors, among others) and higher sales of refined petroleum products, among others.

Mining sector sustains growth. Mining sector production narrowly avoided a decline though it reported a sharply lower growth of 0.2% (Jun: 2.4%), extending its growth streak for the second consecutive month. On a MoM basis, the mining sector deteriorated by 1.3% (Jun: +4.1%); post seasonal adjustment, this translates to a larger 2.2% deterioration (Jun: +8.2%). While production of crude petroleum fell by 2.2% (Jun: +0.4%), this was mitigated by the acceleration in natural gas production to 2.4% (Jun: 2.0%), somewhat mitigating the decline in petroleum production. However, low-to-negative mining sector growth is largely within expectation given Malaysia’s participation in OPEC’s voluntary oil production cut, with June’s figures representing a one-off anomaly.

Electricity index expands. Electricity output increased 7.9% (Jun: 2.1%), its highest growth in eight months. In MoM terms, the index rose 5.3% (Jun: -4.6%). After seasonal adjustments, the index rose by 5.5% (May: -1.4%).

OUTLOOK

A more balanced manufacturing growth. While the E&E subsector remains the primary driver of manufacturing sector growth, we are encouraged by the less concentrated growth focused on the E&E sector, with growth instead spread out among various manufacturing subsectors. This will help alleviate some pressure off the E&E subsector, especially in the event that E&E production starts tapering off. However, we recognise that it is too early to conclude that the manufacturing sector growth will remain balanced moving forward and will keenly monitor the distribution of manufacturing sector growth for the rest of 3Q17.

E&E strength expected to persist. Notwithstanding the more balanced manufacturing sector growth, we expect continued strength in the Malaysian E&E sector grounded by the buoyant growth in semiconductors trade both globally and regionally. The Semiconductor Industry Association (SIA) reported strong double-digit growth of semiconductor sales eight consecutive months to July, reflecting 12 consecutive months of growth. With the global semiconductor sales far from reaching a plateau, we note that other countries, notably Taiwan, likewise supported by sales of semiconductors, particularly with regards to the smartphone production. This may suggest that the tech cycle may have yet to reach its peak and may see some continued growth moving forward.

Reiterate downward bias on mining sector. As with our previous reports, we continue to be pessimistic with mining sector contribution, notwithstanding the one-off production increase in June given the coordinated OPEC production cut. Furthermore, we are cautious that the OPEC’s move to extend production cuts beyond March 2018 (with discussions held with Venezuela and Kazakhstan recently). However, with little concrete information out, we are reserving our judgement on its overall impact on Malaysia’s mining sector production moving forward.

Regional outlook brightening amid optimistic global outlook. Global outlook, as evaluated by Markit’s purchasing manager index (PMI) remained optimistic overall. Global PMI rose to 53.1 (Jul: 52.7) as PMI reported faster growth among consumer, intermediate and investment goods categories. The more bullish overtones were reflected in improvements among major economies with Eurozone (Aug: 57.4; Jul: 56.6), the US (Aug: 52.8; Jul: 53.3), China (Aug: 51.6; Jul: 51.1) and Japan (Aug: 52.2; Jul: 52.1) seeing a more upbeat tone. For now, the global trend continues to support the theme of synchronous global growth, especially for the major economies. This, in turn, led to an overall improvement in ASEAN manufacturing sector which saw a return to the above-50 threshold in August to 50.4 (Jul: 49.3). This marks a marginal improvement in ASEAN manufacturing conditions with five out of seven ASEAN countries covered by Nikkei reporting an upturn (Jul: two out of seven countries reporting above-50 reading).

Upward tilt on 3Q17 GDP growth. Separately, July’s external trade performances were likewise favourable for Malaysia’s growth. Exports rebounded to 30.9% (Jun: 9.9%) while import growth rose to 21.8% (Jun: 3.7%). Import figures likewise showed consumption imports rising 21.9% (Jun: -5.2%), suggesting some improvements in aggregate demand. With both industrial production and trade seeing sharp improvements, we believe that this may portend to a more bullish forecast to the headline growth numbers. However, for now, we are maintaining our current GDP full year forecast of 5.4% for 2017 with 3Q17 growth estimated at 5.3% though a continued strength in industrial production and external trade will likely prompt an upward revision of these numbers.

Source: Kenanga Research - 12 Sept 2017