OVERVIEW

● The Industrial Production Index (IPI) YoY growth rose 2.6% in July (June: +1.1%), on the back of expansion in the manufacturing sector. It also beat consensus and house estimate of 1.4% and 1.6% respectively. On MoM, it rebounded sharply by 2.2% after it declined by 0.5% in June. In seasonally adjusted terms, the IPI rose by 2.6% MoM (June: -1.0%). On year-to-date (YTD), the IPI slowed to 3.2% YoY compared to 4.3% in the same period a year ago.

● The manufacturing sector demonstrated a sustained growth trend despite US-China trade tension that erupted in July. The manufacturing index expanded by 5.2% YoY in July (June: +4.5%). On MoM-basis, it gained marginally by 1.8% (June: +1.5%). However, it rose sharply by 3.1% MoM (May: -0.3%) on a seasonally adjusted basis. Within the sector, the electrical & electronic (E&E) sector expanded by 8.0% YoY (June: 5.5%), contributing 2.2 percentage points (ppts) (June: 1.6 ppts) to the overall IPI growth. The sharply higher exports growth to China in the same month at 37.7% YoY in July (June: +16.9%) could be one of the major reasons for the higher manufacturing growth in July. Despite the better manufacturing output and exports in July it still remains weak and may not be sustainable amid the impact of the escalating US and China trade dispute. Additionally, the threemonth tax holiday did help to boost manufacturing sector sales which expanded by 4.3% YoY in July from 2.7% in June. But it is unlikely to sustain given the reinstatement of the Sales and Services Tax in September

● The mining sector continued its downtrend for the third straight month, falling by 5.9% YoY (June: -9.4%). Natural gas output fell for a sixth consecutive month, contracting 15.2% YoY in July (June: -15.7%). Similarly, extraction of crude oil and gas output fell by 5.9% YoY (June: -9.4%). However, the sector showed some improvement as it expanded by 1.9% MoM (June: -5.4%) thanks to expansion in the extraction of crude petroleum of 5.6% MoM (June: -0.8%). We expect the mining sector to bounce back in 2H18 as OPEC has agreed to eased supply curbs.

● The manufacturing sector growth has slowed to 5.0% year-to-date compared to 6.3% recorded in the same period of the preceding year indicating a slower global trade and economic growth. On further escalation of the US-China trade dispute along with fears of currency devaluation in the emerging markets, we are projecting the 2H18 export growth to moderate between 3.0% to 5.0% (2H17: 17.0%) from 7.0% in the 1H18. This will contribute to a lower 2H18 GDP growth forecasts of 4.8% versus 4.9% in the 1H18 and a slower GDP growth projection of 4.8% for the whole of 2018 compared to 5.9% in 2017.

Source: Kenanga Research - 12 Sept 2018