OVERVIEW

• IPI growth takes a breather. February’s industrial production index (IPI) growth moderated to 3.0% YoY (Jan: +5.4%). This is below the consensus and house estimate of 3.3% and 2.6% respectively. The IPI was rebased to year 2015 (previously 2010).
• The manufacturing index moderated to 4.7% YoY (Jan: +6.9%) dragged by its main sub-index the Electrical and Electronics (E&E) sector which slowed to 5.4% YoY (Jan: +5.7%) as well as the Food, Beverages and Tobacco sector which sharply moderated to 2.1% YoY (Jan: +16.1%).. On MoM-basis, it fell sharply by 9.8%.
• Mining output slows. The February mining sector’s growth contracted by 1.6% YoY (Feb: 1.5%). On a MoM basis, the mining sector declined by a sharper 12.5% YoY (Jan: +1.7) due to contraction in natural gas output.
• Manufacturing to sustain growth trend. While February’s IPI, PMI and export indicators points to a moderating growth in manufacturing activities, we expect the manufacturing sector growth to remain sustainable but on a moderating trend. Hence, we retain our 1Q18 growth estimate at 5.7% from 5.9% recorded in 4Q17.

IPI takes a breather on shorter working month. February industrial production moderated to 3.0% YoY (Jan: +5.4%) due to a shorter working month. February’s figures came in below the consensus and house estimate of 3.3% and 2.6% respectively. However, the month’s index was rebased to year 2015 (previously: 2010). Under the old series, January’s IPI grew by a mere 3.0% YoY. On a MoM basis, the IPI declined sharply by 10.3% (Jan: +1.5%).

Broadly slower. The month’s IPI slowdown was mainly due to weakness in all the major sectors led by manufacturing production. Similarly, slower mining and electricity sectors’ growth also weighed down the IPI. Nonetheless, the index’s three-month moving average (3mma) YoY growth grew 3.8% albeit smaller than 4.3% in January, suggesting that growth momentum is still holding up.

Manufacturing growth on a downtrend. Manufacturing output which accounts for two-thirds of the IPI, moderated to 4.7% YoY (Jan: +6.9%) but declined sharply by 9.8% on a MoM basis as production slowed and exports slumped during the month. The manufacturing index’s 3mma slowed to 5.7% and on seasonally adjusted basis it fell sharply by 5.1%. As the slowdown is largely influenced by seasonality (CNY and shorter working days) we may see a growth rebound in March before it resumes the moderating growth trend. Going by sub-sectors, manufacturing slowdown was broad-based. Electrical and Electronics (E&E) sector slowed to 5.4% YoY (Jan: +5.7%) while the Food, Beverages and Tobacco sector sharply moderated to 2.1% YoY (Jan: +16.1%).

Mining sector contracts. After a solid expansion in January, production from the mining sector contracted by 1.6% YoY (Jan: +1.5%). On a MoM basis, it fell sharply by 12.5% YoY (Jan: +1.7). The main reason for the decline is due to the fall in Extraction of crude Petroleum Oils & Condensates as well as Natural Gas .

Electricity output down. Due to shorter working month and factory closures its no surprise that electricity output moderated to 2.8% YoY in February (Jan: +4.3%). On a MoM basis, the index declined sharply by 8.1% (Jan: - 1.6%). Post seasonal adjustment, the index was unchanged from the preceding month at 0.7%.

March PMI signals moderating trend. Malaysia’s manufacturing PMI dipped below the 50.0 threshold for the second month in March, in tandem with broad-based weaknesses observed across Eurozone, Japan, China and key ASEAN economies. While March’s slowdown in global PMI trend was mainly due to seasonal factors, it also suggests that global economy has reached its peak and will possibly moderate moving forward. The month’s PMI readings are consistent with moderation in global shipments of semiconductors during the month to 20.9% YoY (Jan: 22.7%). However, the broad-based weakness could be an indication that Malaysia’s manufacturing sector’s slowing trajectory is not as bad as earlier expected.

OUTLOOK

Manufacturing sector on sustained growth trend. February’s slower manufacturing output is in line with the month’s lower PMI readings and E&E export figures, supporting our view of a tapering manufacturing sector growth ahead. Given that growth has managed to sustain on a positive trajectory despite seasonal downtrend, we expect manufacturing sector growth to sustain in March. Further lending support to our view is the still high but moderating global semiconductor sales of 21.0% in February, pointing to a sustainable E&E industry ahead. However, following reports of subdued external demand from the local PMI survey, we expect the local manufacturing sector to be susceptible to external slowdown.

Maintain growth forecast and no change in BNM monetary policy. Overall, we maintain our view for 1Q18 economic growth to slow to 5.7% from the 5.9% recorded in 4Q17. Our GDP forecast for 2018 is maintained at 5.5% (2017: 5.9%). In line with the lower growth forecast for the year, we expect BNM to retain the OPR rate at its current level to accommodate growth.

Source: Kenanga Research - 12 Apr 2018