Overview

• IPI growth at 13th- month low. The industrial production index (IPI) growth slowed to 3.4% YoY in October (Sep: +4.7%), the lowest growth in 13 months and below Bloomberg’s consensus median estimate of 4.1%. The growth was however higher than the house estimate of 2.1%.
• Manufacturing growth turned weaker. Manufacturing growth in October slowed for three months consecutively at 4.2% YoY (Sep: +5.7%). The electrical and electronic (E&E) sub-sector moderated to 5.9% (Sep: +6.7%), while the petroleum, chemical, rubber & plastic products subsectors slowed to 2.1% (Sep: +4.9%).
• Mining sector remained modest. The mining sector grew at a slower pace of 0.8% YoY in October, following a 2.1% growth in September. It was mainly attributable to a tepid expansion of 1.4% in natural gas output (Sep: +3.9%).
• Buoyant 4Q17 outlook for IPI. In view of the upbeat domestic economic conditions and firming external demand, we maintain a positive outlook for the 4Q17 IPI growth. As such, we maintain our 4Q17 GDP growth forecast at 5.5%, with the full year projection to reach 5.8%, from the 4.2% registered in 2016.

Moderation for the second month. The industrial production index (IPI) YoY growth slowed for the second straight month to 3.4% YoY in October from a growth of 4.7% in September (Aug: +6.8%). This was below the Bloomberg’s consensus median estimate of 4.1% but higher than the house growth estimate of 2.1%. October’s IPI performance marks the lowest growth since September 2016 (3.1%), or a 13th-month low. On a MoM basis, the IPI rebounded to 2.7% after it fell by 0.1% in September. Post-seasonal adjustment, the IPI registered 0.8% MoM decline. Apart from the higher base effect, the October’s slower IPI growth was mainly due to a slowdown in manufacturing output.

Weaker manufacturing growth. Manufacturing sector saw a third consecutive month of growth slowdown at 4.2% YoY (Sep: +5.7%), hitting the slowest growth rate in a year. On a MoM basis, manufacturing sector growth was higher at 1.6% than September’s 1.0%.Post-seasonal adjustment, manufacturing output declined by 1.1% (Sep: -0.2%).

Growth moderation across subsectors. The electrical and electronic (E&E) subsector, the largest contributor to manufacturing growth, grew at a slower pace of 5.9% (Sep: +6.7%), thus contributing a lower 1.7 ppts to headline IPI growth (Sep: +2.0 ppts contribution). Notably, the three consecutive months of slowdown in E&E production (from Jul-17) mirrored the moderation in E&E exports growth during the period. Furthermore, the “petroleum, chemical, rubber & plastic products” (PC) subsectors observed a sharp moderation of growth to 2.1% (Sep: +4.9%), shedding as much as 0.9 ppts from the headline IPI growth in October. Slower growth was also seen in other manufacturing subsectors, including “Transport Equipment & Other Manufactures” and “Food, Beverages & Tobacco”.

Manufacturing sales growth buoyant. In a separate report, manufacturing sales painted a rosier outlook for the manufacturing sector, expanding by a solid 11.0% in October, the eleventh month of double-digit growth. Similar to preceding month, growth in manufacturing sales was driven by the E&E subsector, the PC subsector and the Non-metallic Mineral Products, Basic Metal and Fabricated Metal Products (NM) subsector.

Mining sector growth remained modest. The mining sector grew at a more moderate pace of 0.8% YoY following a 2.1% growth in September. The moderation in mining sector growth was primarily due to a slower expansion of 1.4% in natural gas output (Sep: +3.9%). Likewise, the feeble crude petroleum growth of 0.3% in October (Sep: 0.7%) further weighed on the overall mining sector expansion. On a MoM basis, the mining sector returned to a positive growth of 5.3% (Sep: -1.7%). Post-seasonal adjustment, it increased by 0.4% (Sep: +0.7%).

Electricity output accelerated. Electricity output expanded by a faster 4.6% YoY (Sep: 2.2%) after two consecutive months of growth moderation. On a MoM basis, the index rose 6.0% (Sep: -6.5%). Post-seasonal adjustment, it grew by 2.1% (Sep: -2.2%).

Outlook

Seasonal downward pressure on E&E. Entering 4Q17, the domestic manufacturing output would likely face some bumpy roads ahead. While the strong E&E sales has provided a much-needed lift for manufacturing in the past few months, we expect the buoyant global demand for E&E to have peaked before the holiday season and to fizzle out thereafter in 4Q17. We therefore expect some downward pressure on manufacturing output during the last quarter of the year.

IPI outlook remain positive. Despite the tepid industrial production number in October, the upbeat domestic economic conditions pointed to brighter IPI outlook for the remaining two months of the year. Notably, Malaysia November manufacturing PMI indicated a sharp recovery in the sector, as seen in the robust new orders and rising factory production supported by elevated global and domestic demand. This suggests a stronger recovery momentum for industrial production in the coming months. We thus maintain a positive outlook for IPI for the remainder of the year. As such, we maintain our 4Q17 GDP growth forecast at 5.5%, with the full year GDP growth projected to accelerate to 5.8% compared with 4.2% in 2016.

Sustained strength in regional manufacturing. The global economies continue to exhibit solid growth trajectory in the manufacturing sector, further lifting the optimism in Malaysian industrial growth. The global PMI rose to 54.0 in November, the highest reading since Mac 2011. The manufacturing PMI in major economies continued to perform well in November (refer to “Malaysia Manufacturing PMI” report published on 5th December for details). The global recovery in manufacturing reinforces our benign outlook on IPI in the near term.

Source: Kenanga Research - 13 Dec 2017