OVERVIEW

● Industrial production growth eased in May to 3.0% YoY (April: 4.6%). May’s growth exceeded the house’s conservative estimate of 1.8% but was in line with the Bloomberg median consensus’ estimate. While the index rebounded by 3.1% on a MoM basis (April: -3.5%), it grew marginally on a seasonally adjusted basis at 0.2% MoM (April: 1.5%).

● Manufacturing index grew at slower pace of 4.1% YoY (April: 5.4%) as growth moderated across all the sub-sectors. On MoM, it rebounded by 3.2% from -2.1% in April. Output growth of electrical and electronic products (E&E) in particular slowed to 4.8% (April: 7.1%) contributing 1.3 percentage points (ppts) to the overall IPI growth, lower than April’s 1.9 ppts. This is in line with lower growth of regional semiconductor shipments during the month. Meanwhile, output growth of transport, equipment and other manufactures eased to 5.0% (April: 7.8%), shedding its contribution to the overall IPI growth to 0.4 ppts (April: 0.6 ppts).

● The mining sector, conversely, declined by 0.5% in May (April: +1.8%). This is mainly attributable to lower output of natural gas. Natural gas output declined for the fourth month by 4.8% in May, shaving off 2.6 ppts (April: -0.2 ppts) of its contribution to the overall IPI growth. Nonetheless, we expect crude petroleum extraction activity to ease moving forward due to production bottlenecks and modest capital expenditure spending from Petronas. Similarly, we expect natural gas demand to remain soft on the back of a revision in the natural gas base tariff for non-power sector in Peninsular Malaysia to RM31.92/mmBtu from RM30.90/mmBtu in 2H18, potentially hampering production.

● Though we maintain our 2Q18 GDP growth estimate at 5.3%, albeit lower than 1Q18’s 5.4%, we may have to revise our estimate if June data comes in higher-than-expected combined with the better IPI growth in the first two months of the quarter. Domestic growth may provide the lift for 2Q18 GDP growth, potentially matching or even exceeding 1Q18’s 5.4% growth as the government’s move to zero-rate the Goods and Services Tax could augur well for domestic consumption. In fact, the volume index of the wholesale and retail trade showed a strong growth rebound of 4.0% MoM in May (April: -5.1%), supported by both wholesale and retail volume growth. We expect June data to be better.

● Nonetheless, we remain cautious as key manufacturing indicators continue to point towards moderation on the external front. Global manufacturing PMI continues to deteriorate while 3MMA YoY global industrial production growth has slowed further to 3.9% in April (March: 4.0%). In particular, the 3MMA of advanced economies moderated to 3.3% in April (March: 3.5%). Emerging Asia’s industrial production also moderated to 6.0% (March: 6.1%). With trade tensions escalating in the background, we expect BNM to retain its Overnight Policy Rate at 3.25% to support growth.

Source: Kenanga Research - 13 Jul 2018