OVERVIEW

? Malaysia’s industrial production index (IPI) expanded 4.6% YoY in April (Mar: 3.1%). The index came in higher than the house and Bloomberg median consensus estimates of 3.8% and 4.4% respectively. On a MoM basis, the index fell 3.5% (Mar: +9.9%) across all sector, suggesting the expansion was likely due to a lower base recorded the preceding year. On a seasonally adjusted basis, the IPI grew 1.5% MoM, reversing the 0.2% decline in March.

? Manufacturing index grew 5.3% YoY in April (Mar: 4.1%) on expansion almost across all sub components with electrical & electronics (E&E) products contributing the highest at 1.82 percentage points (ppts) to the overall growth. However, the index fell 2.1% on a MoM basis (Mar: +9.2%). Along with May deterioration in the PMI index to a record 11-month low, we see a slowing trend in trade and industrial production growth in the coming months.

? Meanwhile, the mining sector grew 1.8% YoY (Mar: 0.0%) in April as the crude oil index surged to an 18-month high. Crude petroleum index grew 4.4% (Mar: 1.1%) while natural gas further fell for the third month to 0.4% (Mar: - 0.9%). Average Brent crude prices jumped 45.3% YoY to USD75.2/barrel in April from USD51.7/barrel a year ago and are expected to further lift the index in May. With a steep drop in crude oil exports from Venezuela and doubts over OPEC lifting its production cut anytime soon, we expect oil prices to remain elevated in the coming months supporting the mining index.

? For 2Q18, higher pre-election public spending and low fuel prices could have given a slight boost to the economy in the 2Q18. However, we retain our expectation that the manufacturing sector would continue its downtrend in line with the global semiconductor slowdown and the impact of the uncertainty arising from the US-incited trade tension. In fact, the latest Markit manufacturing PMI showed global export growth, output, and purchases slipping at the start of 2Q18. As a result, we estimate 2Q18 GDP growth to marginally slow to 5.3% from 5.4% in 1Q18.

? Although exports growth rebounded in April, we maintain that its growth trend would moderate for the rest of the year. Along with the escalating global trade tension, it would weigh on manufacturing sector’s growth trajectory. While the reintroduction of fuel subsidies and the zero-rating of the goods and services tax (GST) in June would likely boost private consumption in 3Q18, it would be offset from significant government spending cuts to make up for the loss in GST revenue. Hence, we project GDP growth to slow this year to 5.1% from 5.9% in 2017.

Source: Kenanga Research - 12 Jun 2018