Overview

? September’s IPI disappoints. The industrial production index (IPI) saw a slower growth of 4.7% YoY in September (Aug: +6.8%). This was below Bloomberg’s consensus median estimate of 6.3% (ranging from 4.5-6.7%) and the house forecast of 6.7%.

? Broad based moderation in manufacturing growth. Manufacturing sector grew at a slower rate of 5.7% YoY (Aug: +7.6%). The electrical and electronic (E&E) subsector also saw a moderating growth of 6.7% (Aug: +8.7%). With slower growth observed across other manufacturing subsectors, suggesting a taper in general economic activity.

? Mining sector’s surprising expansion. The mining sector grew by 2.1% in September, moderating from August’s eight-month high of 5.3%. However, this was an extension of the mining sector’s growth streak to its fourth consecutive month of expansion.

? Risks of tapering demand weighs against growth. The continued slide in manufacturing sector production and, to an extent, manufacturing sales growth may flag moderation in domestic and possibly external demand. Despite manufacturing seeing its highest growth since 2Q14 (2Q17: +6.2%), we believe that it will be prudent to maintain a 3Q17 GDP growth forecast of 5.3% (2Q17: 5.8%) for now pending a closer analysis of the supply-side factors.

Short-lived acceleration. The industrial production index (IPI) saw a slower growth of 4.7% YoY in September (Aug: +6.8%). This was below Bloomberg’s consensus median estimate of 6.3% (ranging from 4.5- 6.7%) and the house forecast of 6.7% growth. September’s numbers ends the 2-month episode of acceleration where IPI growth was in excess of 6.0% in Jul-Aug; prior to July, IPI growth was generally below 5.0%. On a MoM basis, the IPI shrunk by 0.1% (Aug: -0.2%) though post-seasonal adjustment, the decline was more prominent at -1.0% MoM. Moderation in September’s growth was largely reflected across its constituent industrial sectors.

Strong 3Q17 production. Notwithstanding sharply slower growth in September, strong Jul-Aug production numbers buoyed 3Q17’s numbers to 5.9% YoY (2Q17: 4.3%), its fastest growing quarter since 1Q15.

Manufacturing growth takes a breather. Manufacturing sector expanded by a slower 5.7% (Aug: +7.6%), continuing its second consecutive month of growth moderation. As with the headline growth, despite the sharper moderation in growth, 3Q17 manufacturing sector grew by a robust 7.1% on the back of strong Jul-Aug numbers, catapulting 3Q17 to its highest growth since 2Q14 (2Q17: +6.2%).

Broad-based growth moderation. As the key driver of manufacturing growth, the electrical and electronic (E&E) subsector also saw a moderating growth of 6.7% (Aug: +8.7%), hence contributing just 2.0 ppts to headline IPI growth (Aug: +2.5 ppts contribution). Slower growth was also observable across other manufacturing subsectors, suggesting a taper in general economic activity, rather than a sector-specific phenomenon. Notably, the food and beverages subsector (FB) and petroleum, chemical, rubber and plastic product (PC) subsectors also saw growth moderation with FB subsector growing by just 8.0% (Aug: +9.4%) and PC subsector expanding 4.9% (Aug: +7.0%). However, the E&E, FB and PC remain the key contributors to manufacturing IPI growth.

Manufacturing sales growth robust but moderating. In a separate report, growth in September’s manufacturing sales was likewise on a moderating trend, expanding by a lower 10.6% albeit sustaining its double-digit growth for the tenth consecutive month and its growth streak for the thirteenth straight month. Growth in manufacturing sales continues to be driven by the E&E subsector, the PC subsector and the Nonmetallic Mineral Products, Basic Metal and Fabricated Metal Products (NM) subsector.

Modest mining sector growth. The mining sector expanded by 2.1% YoY in September, with growth retreating from August’s eight-month high of 5.3%. However, this was an extension of the mining sector’s growth streak to its fourth consecutive month of growth. The moderation in mining sector growth came after strong expansion in natural gas output in August (Sep: +1.7% vs. Aug: +6.3%) though it was noteworthy that crude petroleum mining saw a mild 0.7% expansion (Aug: -1.7%) after declining in seven out of eight months of Jan-Aug17. On a MoM basis, the mining sector shrunk by a slower 1.7% (Aug: -2.7%) though seasonally adjusted, it expanded by +0.7% instead (Aug: -2.8%).

Mining rebounded strongly in 3Q17. Combined with mining sector upside from Aug17, September’s numbers bring the quarterly expansion in mining production to 2.5% (2Q17: -0.6%) its highest in three quarter – mining sector expansion occurred notwithstanding Malaysia’s participation in the voluntary oil production cut in the OPEC pact) though this was largely attributable to stronger expansion in natural gas mining during the quarter.

Electricity index continues moderating. Electricity output expanded by 2.2% YoY (Aug: 3.0%), moderating for its second consecutive month though this also represents its fifth consecutive month of expansion. In MoM terms, the index shrunk 6.5% (Aug: +1.1%) though post-seasonal adjustment, it fell by 2.2% only (Aug: -1.5%).

Outlook

Supporting headline growth. Strong expansion in the index of industrial production will lend strength to the 3Q17 GDP growth rate, particularly with regards to the value-added manufacturing growth. However, notwithstanding the higher 7.1% growth in 3Q17 manufacturing sector, its impact to headline GDP may be mitigated by a relatively lacklustre expansion in retail trade (3Q17: 10.4% vs. 2Q17: 11.5%) which may weigh against service sector expansion as indicated by the coincident release of the Index of Services and the Distributive Trade Index. Growth in the index of services moderated slightly to 6.9% for 3Q17 (2Q17: 7.0%). On the balance, we believe that it will be prudent to maintain a 3Q17 GDP growth forecast of 5.3% (2Q17: 5.8%) for now pending a closer analysis of the supply-side factors.

Tapering demand likely weighing against manufacturing production. The continued slide in manufacturing sector production and, to an extent, manufacturing sales growth may flag moderation in domestic and possibly external demand. While the slowdown in manufacturing sales reflects the manifestation of these moderating demand, these signs have also cropped up in Malaysia’s manufacturing PMI numbers that highlighted continued contraction in new orders. While lower new orders were largely attributed by falling domestic demand previously, export new orders have likewise declined somewhat, signalling possible slowdown in external demand moving forward. It is noteworthy that the output PMI subindex has advanced for three consecutive months (Aug-Oct17); we are cautious if the eventual decline in the output PMI may translate into a sharper slowdown in industrial production. We also note that both short-term outlook (as reflected by lower input buying) and, more importantly, medium-term outlook (as reflected by cut in payroll) suggest pockets of pessimism among manufacturers.

Buoyant global semiconductors; easing domestic E&E growth. The slower expansion in the E&E production stands in contrast with the continued strength in global semiconductor sales. Globally, semiconductor sales continued to soar at double-digit levels with a growth of 22.2% growth in September (Aug: 23.9%) to a sale of USD35.95b. Indeed, semiconductor sales growth extended its growth streak for the 14th consecutive month and its double-digit growth streak for the 10th consecutive months. However, as noted in our previous report, we are more restrained on how this would translate for Malaysia’s E&E industry, given continued moderation in E&E growth numbers. On higher 4Q16 base effects, we suspect that E&E growth will likely level off further in 4Q17. While we maintain our stand that the E&E sector will likely remain the key manufacturing growth driver for the coming quarters, we recognise the challenge for Malaysia to position itself as a key player in global E&E supply chain.

Mining sector upside. Strong mining sector numbers for September and indeed, 3Q17, was a pleasant upside surprise given Malaysia’s participation in OPEC’s production cut. This likely suggests that the crude oil sector decline likely bottomed out. While we continue to expect seeing bouts of slowdown in crude oil production, on the balance, we expect the mining index to see a mild growth with support from modest expansion in natural gas production. This, along with crude oil price support from OPEC’s production cut, may promote a resumption of fixed capital investments into the oil and gas (O&G) sector, For now, we reckon that further extension to OPEC’s production cuts beyond March 2018 (as is being discussed by OPEC) is likewise unlikely to translated into prolonged downturn in the mining index.

Continued strength in regional and global outlook. In contrast to Malaysia, the global PMI rose to a six and a half year high of 53.5 in October (Sep: 53.2). This follows continued strength in business conditions among major advanced market economies (AMEs). The Eurozone, for one, saw its already strong PMI advancing to 58.6 in October (Sep: 58.1); the US PMI similarly advanced to 54.6 after an already strong reading of 53.1 from the previous month. Back in Asia, business conditions remain strong among several major Asian economies. China and Japan continued to report stable above-50 reading of 51.0 and 52.8 respectively (Sep: 51.0 and 52.9). Closer to home, the Nikkei ASEAN Manufacturing PMI recorded a slightly higher reading of 50.4 in October (Sep: 50.3). This came as some of the constituent ASEAN countries saw further expansions in both output and new orders. Five out of seven ASEAN countries covered by Nikkei reported above-50 reading compared to just four countries during September. These countries include Philippines (53.7; Sep: 50.8), Vietnam (51.6; Sep: 53.3), Singapore (51.3; Sep: 48.6), Myanmar (51.1; Sep: 49.4) and Indonesia (50.1; Sep: 50.4). On the other side of the neutral threshold, Thailand joined Malaysia (Malaysia Oct PMI 48.6; Sep: 49.9) after Thailand moved back below the 50.0 threshold at 49.8 (Sep: 50.3, after crossing threshold from 49.5 during the previous month).

Source: Kenanga Research - 10 Nov 2017