OVERVIEW

• IPI growth below expectation. January’s industrial production index (IPI) growth inched higher at 3.0% YoY (Dec: +2.9%). This was sharply below growth estimates of consensus (+6.8%) and the house (+8.7%).
• Manufacturing growth in January moderated to 4.8% YoY (Dec: +5.3%), mainly dragged by the Petroleum, Chemical, Rubber & Plastic Products (PC) index, the lowest growth in three months at 2.1% YoY (Dec: 3.6%). Meanwhile, the electrical and electronic (E&E) index slowed to 4.0% (Dec: +4.1%), its slowest since July 2016.
• Mining and electricity picks up. The January mining sector’s growth expanded at 1.5% YoY, the highest growth in four months (Dec: -4.1%); while electricity output, edged up 4.3% YoY (Dec: 3.9%) due to a lower base effect.
• A resilient manufacturing to hold up 1Q18 growth. We expect the 1Q18 manufacturing sector growth to remain resilient, though tapering, on the back of sustained external demand. Hence, we maintain our 1Q18 GDP forecast for a slower growth of 5.7% following the 5.9% recorded in 4Q17.
• Manufacturing to brace through 2018 challenges. While January’s IPI and PMI indicators points to a moderating growth in manufacturing activities, we see January’s higher-than-expected exports and the strength of the Ringgit as indications of a resilient manufacturing sector going forward.

IPI edged up but sharply below estimates. Industrial production inched higher at 3.0% year-on-year (YoY) in January, faster than the 2.9% YoY increase seen in December. However, the month’s expansion was still sharply below the consensus (Bloomberg survey) and house estimate of 6.8% and 8.7% respectively. On a MoM basis, the IPI declined 4.5% (Dec: 2.2%), the lowest growth in nine months. January’s slower than expected growth was mainly due to persistent slowdown in the manufacturing index, even while the mining and electricity indices expanded. Post seasonal adjustment, the index declined 1.0% MoM (Dec: - 0.2%).

Manufacturing growth slowed. Little signs of revival were seen in manufacturing output growth, which slowed for the second month to 4.8% YoY from December’s 5.3% YoY growth. The slowdown defied the manufacturing exports growth during the month, which surged to 20.4% YoY. The slowdown was more pronounced on a MoM basis, as output declined by 5.8% MoM (Dec: +2.2%). However, the MoM decline in manufacturing growth is consistent with the historical trend observed in the past five years of January manufacturing indices, suggesting the monthly decline could be attributed to seasonal factors.

Broad-based manufacturing slowdown. Slowdown in manufacturing was broad-based across all sub-indices led by the Petroleum, Chemical, Rubber & Plastic Products (PC) index, which observed the lowest growth in three months at 2.1%

YoY (Dec: 3.6%). Hence, the PC index contributed a lower 0.8 percentage points (ppts) to the headline IPI manufacturing index (Dec: 1.2 ppts). Similarly, the electrical and electronic (E&E) index moderated further to 4.0% YoY (Dec: 4.1%), contributing 1.1 ppts to the headline IPI manufacturing index (Dec: 1.2 ppts). Slower growth was also seen in the “textiles, wearing apparel, leather product, footwear”, “food, beverages & tobacco” and “wood products, furniture, paper products, printing” indices. Other notable changes during the month include the rise in the “transport equipment & other manufactures” and “non-metallic mineral, basic & fabricated metal” indices which observed stronger growth at 28.2% and 17.2% respectively (Dec: 5.4%; 4.7%). This is consistent with the growth in January’s exports of “manufactures of metal” (14.8%) as well as “transport equipment” (32.0%).

Manufacturing sales returns to double-digit growth. On a separate note, manufacturing sales expanded at 10.8% YoY (Dec: 9.4%) to RM67.8b. As in preceding years, E&E components were the largest contributor to the month’s sales value, as growth nearly tripled at 17.2% (Dec: 6.4%), contributing a higher 1.5 ppts to overall manufacturing sales value (Dec:0.6 ppts).

Mining sector growth at four months high. The January mining sector’s index expanded at 1.5% YoY, the highest growth in four months (Dec: -4.1%). On a MoM basis, the mining sector’s growth was unchanged from the preceding month at 2.4%. The mining index observed a broad-based expansion across the “extraction of crude oil & natural gas”, “crude petroleum” and “natural gas” sub-indices and was consistent with the stronger exports of commodities during the month, particularly of LNG.

Electricity output inched up on lower base. Electricity output inched higher at 4.3% YoY (Dec: 3.9%) due to a lower base effect, while on a MoM basis, the index declined by 1.6% (Dec: +1.7%). Post seasonal adjustment, the index declined by - 0.7% MoM (Dec: +0.2%).

February PMI lags behind, dips below 50.0. Malaysia’s Manufacturing PMI came in below the 50.0 threshold in February at 49.9 as weaker demand, particularly from the export-oriented sector weighed on new orders. This was despite the upturn in global PMI during the month, particularly on new export orders, which rose to its highest since early 2011, indicating a revival of international trade flow. Malaysia’s sluggish February PMI suggests that the Malaysian manufacturing activities is potentially lagging behind the regional and global manufacturing uptrend. Regional economies broadly observed a pick-up in their February’s Manufacturing PMI as the Nikkei ASEAN PMI rose to 50.7 in February (Jan: 50.2). Meanwhile, the Global PMI stood at 54.2 in February.

OUTLOOK

Resilient manufacturing growth trend in 1Q18. January’s slowdown in manufacturing output, along with the mild dip in February’s PMI performance paints a challenging growth trajectory for the manufacturing sector. Nonetheless, January’s surge in exports breathes a relief to the 1Q18 outlook of the sector as demand for E&E is seen elevated. Moving forward, while we foresee relative moderation in E&E growth in 2018, we expect the 1Q18 manufacturing sector growth to remain resilient on the back of sustained external demand. Hence, we maintain our 1Q18 GDP forecast for a slower growth of 5.7% following the 5.9% recorded in 4Q17.

Stronger Ringgit lowers input cost. Additionally, we expect the recent strength of the Ringgit to lower the cost of raw materials and thereon reduce the cost of production. As a result, we do not expect prices of exports to surge from the stronger Ringgit, thereon we foresee sustained external demand and manufacturing activities.

Manufacturing sector to brace through 2018 challenges. We expect the growth performance of the IPI and manufacturing to slow in February due to the shorter working days in addition to the Lunar New Year holidays. We retain our growth outlook on the manufacturing sector for this year despite the recent developments with regards to Trump administration’s planned tariff hike on steel and aluminium imports as we do not foresee significant changes to the demand or production of local manufactures from the protectionist move. However, we are cautious on the impact of potential retaliation by the China and EU, which could potentially impact demand for local manufactures. Our GDP forecast for 2018 is 5.5% (2017: 5.9%)

Source: Kenanga Research - 14 Mar 2018