OVERVIEW

● The Industrial Production Index (IPI) YoY growth moderated to 1.1% YoY in June (May: +3.0%), dragged down by declining mining output despite a healthy uptick in the manufacturing sector. It was lower than consensus’ and house estimate of 3.2% and 2.1% respectively. On MoM, it fell 0.5% (May: +3.1%). In seasonally adjusted terms, the IPI fell by 1.0% MoM (May: +0.2%). On a quarterly basis, the index YoY growth slowed to 2.8% in 2Q18 from 3.9% in 1Q18.

● The manufacturing sector gained on sustained growth trend despite escalating US-China trade tension. Manufacturing index expanded by 4.5% YoY in June (May: +4.1%). It gained 1.5% MoM (May: +3.2%). However, it fell by 0.3% MoM (May: +0.8%) on a seasonally adjusted basis. The month’s growth was largely attributable to an expansion of its biggest sub-sector, the electrical & electronic (E&E) sector (+5.5% YoY vs May: 4.8%), contributing 1.6 percentage points (ppts) (May: 1.3 ppts) to the overall IPI growth. The impact of the escalating trade war between the US and China is increasingly uncertain for the prospects of Malaysia’s exports especially once the US carries out the latest USD200.0b tariff on Chinese exports to US. The combined share of Malaysia’s exports to both US and China is about 23.0% (US: 9.5% Vs China: 13.5% of total exports in 2017).

● The main drag to the overall IPI was the mining sector as it continues its downtrend for the second straight month, falling sharply by 9.4% YoY (May: -0.5%). It was largely due to broad-based production cut across all its three sub sectors. Natural gas output fell the most and for the fifth consecutive month, contracting 15.7% YoY in June (May: -4.8%). Similarly, extraction of crude petroleum and gas output fell by 2.2% YoY (May: +4.7%). As a commitment to end a global oil supply glut in cooperation with the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC nations, Malaysia’s oil production cutback target reached 45.0% in June. We expect the mining sector to bounce back in 3Q18 as OPEC has agreed to increase production from July onwards.

● A slower 2Q18 GDP growth due to post election effect and weaker exports. We maintain our 2Q18 GDP growth estimate at 5.3%, slightly lower than 1Q18’s 5.4%, on the back of slower exports and the unprecedented 14th General Election result. The manufacturing sector growth, a proxy to exports, slowed in the 2Q18 to 4.7% YoY growth from 5.2% in 1Q18 in line with our expectation. Given that the implementation of the ‘tax holiday’ began in June (final month of the 2Q18), we believe the positive impact from an expected higher consumption growth may not be enough to lift the 2Q18 GDP growth above the 1Q18.

Source: Kenanga Research - 13 Aug 2018