OVERVIEW

● The Industrial Production Index (IPI) increased by 2.2% YoY in August (July: +2.6%), in line with Bloomberg consensus but slightly above house estimate of 1.9%. However, the month’s IPI declined by 0.8% MoM after it rose by 2.2% in July. In seasonally adjusted terms, the IPI declined by 0.4% MoM (July: +2.6%). Year-to-date (YTD), the index has slowed to 3.1% YoY (Jan-Aug 2017: +4.6%). Its three-month moving average growth moderated to 1.9%, the lowest since the index was rebased to 2015 indicating a downturn in industrial output.

● Apart from the slowdown of the global semiconductor super-cycle the manufacturing sector growth moderated amid escalating US-China trade spat. The manufacturing index grew by 4.3% YoY in August (July: +5.2%) despite the higher base last year (Aug 2017: +7.4%). The sector however declined by 0.1% MoM (July: +1.8%) and dropped sharply by 2.3% MoM on a seasonally adjusted basis. The electrical & electronic (E&E) sector grew by 4.5% YoY, albeit slower than July’s 8.0% growth. Consequently, its contribution to overall manufacturing sector declined to 1.3 percentage points (ppts) from 2.2 ppts in July. Meanwhile, manufacturing sector sales grew by 8.1% YoY in August (July: 9.6%) thanks to the 3-month tax holiday period despite the 0.3% YoY fall in exports on the back of slowing E&E demand.

● The mining sector continued its downtrend for the fourth straight month, falling by 4.6% YoY (July: -5.9%). The three key components in mining sector namely extraction of crude oil & natural gas, crude petroleum and natural gas contracted by 4.7%, 0.6% and 7.9% YoY respectively in August (July: -5.9%, -4.4% and -15.2% respectively).

● We expect the IPI to moderate in the following months as US-China trade war heightens and demand for E&E would slide further. However, its growth would partly be supported by private consumption. So far, the manufacturing output has slowed to 4.9% YTD compared to 6.5% recorded in the same period of last year. In contrast, Malaysia’s Purchasing Manager Index (PMI) expanded, rising to a 10-month high at 51.5 in September (August: 51.2). The expansion in the latest PMI signals a possible growth improvement despite trade war risk and the possible adverse impact of Sales & Service Tax (SST) which takes into effect in September. Hence, we are projecting the 2H18 export growth to moderate between 3.0% to 5.0% (2H17: 17.0%) from 7.0% in the 1H18 on the back of slower global demand and rising volatility in the global financial markets as the US Fed signalled a more hawkish stance. Subsequently, we expect 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 Oct 2018