OVERVIEW

• IPI growth on 3-month high. The November industrial production index (IPI) expanded to 5.0% YoY from October’s 3.4%, beating both the consensus and house estimates of 4.6% and 4.3% respectively.
• Buoyant manufacturing growth. Manufacturing growth in November quickened to a three-month high of 6.7% (Oct: 4.2%). The petroleum, chemical, rubber & plastic products subsectors surged to 7.5% (Oct: +2.1%); while electrical and electronic (E&E) subsector accelerated to 6.9% (Oct: +5.9%).
• Mining sector moderated. The mining sector moderated for the third straight month to 0.2% in November compared to the yearly peak of 5.3% in August. It was mainly due to a flat natural gas output (Oct: +1.4%).
• Hint of solid 4Q17 growth. With the upbeat IPI data in November, we might see a relatively strong 4Q17 GDP growth. We therefore maintain our GDP forecast of 5.5% in 4Q17 (3Q17: 6.2%), capping the full year GDP growth to an estimated 5.8% (2016: 4.2%).
• Strong case for a rate hike. The higher than expected IPI growth in November may suggest that the economic growth trajectory could remain well above its potential or more than 5.0% in 4Q17, bolstering the case for BNM to raise the OPR by 25bps as early as 1Q18.

Strong rebound in November. The industrial production index (IPI) registered a convincing growth of 5.0% YoY in November following two months of moderating growth (Sept: 4.7%; Oct: 3.4%). The November growth was comfortably higher than both the Bloomberg’s median consensus and house estimates of 4.6% and 4.3% respectively. On a monthly basis, the IPI fell 1.4%, consistent with the seasonal decline typically seen for the month. Postseasonal adjustment, IPI grew by 1.9% MoM (Oct: -0.8%). Overall, the positive IPI growth was mainly driven by the solid manufacturing performance.

Buoyant manufacturing growth. The manufacturing sector growth reversed its moderating trend in the previous three months, accelerating to a three-month high of 6.7% in November (Oct: 4.2%). On a monthly basis, the manufacturing production fell 1.7%, though the pace of decline was the mildest compared with the typical November slowdown seen in the preceding years. After seasonal adjustment, manufacturing output turned to a positive growth of 2.8% MoM (Oct: -1.1%).

…broad-based growth across subsectors. The manufacturing sector saw a broad-based growth across its subsectors. Particularly, the “Petroleum, Chemical, Rubber & Plastic Products” (PC) subsector surged to a robust 7.5% growth in November (Oct: 2.1%), thereby contributing a higher 2.6 percentage points (ppts) to headline manufacturing growth (Oct: 0.8 ppts). Meanwhile, the “Electrical & Electronics” (E&E) production quickened to 6.9% (Oct: 5.9%), contributing 2.0 ppts to manufacturing growth. Likewise, “Food, Beverages & Tobacco” (FB) grew 8.2% (Oct: 7.0%) with a solid 0.9 ppt contribution.

Manufacturing sales remained resilient. In a separate report, manufacturing sales increased at a strong pace of 10.9% in November, reaffirming the favourable manufacturing production environment. The subsectors “E&E”, “PC” and the “Non-metallic Mineral Products, Basic Metal and Fabricated Metal Products” (NM) remained the main driver for manufacturing sales, contributing 79.7% to the total sales value.

Mining continue to moderate. The mining sector moderated for the third month to 0.2% in November, compared to the yearly peak of 5.3% in August. The weaker growth in mining sector was mainly due to a flat natural gas output (Oct: +1.4%). However, the crude petroleum remained stable with production growth of 0.3% in November (Oct: +0.3%), supporting the overall mining sector expansion. On a monthly basis, the mining sector growth slowed sharply to 0.2% (Oct: +5.3%). Similarly, mining growth was flat after seasonal adjustment (Nov: +0.4%).

Electricity output gradually slowing. Electricity output remained stable albeit slower at 3.9% YoY (Oct: 4.6%). On a monthly basis, the index fell 4.2% (Oct: +6.0%). With seasonal adjustment, it increased 0.8% (Oct: +2.1%).

OUTLOOK

Hint of solid 4Q17 growth. Moving into December, we remain slightly conservative and expect a somewhat flattish growth for the month, in consideration of the December PMI which pointed to mostly stagnating manufacturing conditions. Nonetheless, we are overall cautiously optimistic on the manufacturing outlook, supported by sustained demand for E&E amid a synchronised global trade recovery. Furthermore, the improving domestic demand alongside upward momentum in external demand would support the prospect of a stronger manufacturing sector going forward. With the upbeat IPI data in November, we might see a relatively firm 4Q17 GDP growth (3Q17: 6.2%), capping the full year GDP growth to an estimated 5.8% (2016: 4.2%).

Bolster the case for a rate hike. We reiterate our view that a relatively strong economic growth trend supports the case for a monetary tightening this year. The higher than expected IPI growth in November reinforces the view that the economic growth trajectory could remain well above its potential or more than 5.0% in 4Q17, bolstering the case for BNM to raise the OPR by 25bps as early as 1Q18. A second rate hike should not be ruled out contingent on a sustained growth momentum in the domestic economy.

Source: Kenanga Research - 12 Jan 2018