OVERVIEW

● The Industrial Production Index (IPI) edged up by 2.3% YoY in September (Aug: +2.2%), matching Bloomberg consensus but a tad higher than house estimate of 2.1%. Despite the uptrend, on MoM basis, it continued to fall, contracting by 0.3% (Aug: -0.8%). In seasonally adjusted terms, the IPI remains unchanged at -0.4% MoM. Year-to-date (YTD), the index has slowed to 3.1% YoY (Jan-Sept 2017: +4.6%) and moderate to 2.4% YoY in 3Q18 (2Q18: +2.8%).

● Despite the escalating US-China trade war continues to weigh on the domestic manufacturing sector, the manufacturing index expanded by 4.8% YoY in September (Aug: +4.3%). On a seasonally adjusted basis, it rebounded by 1.5% MoM (Aug: -2.3%). Electrical & Electronic (E&E) sector remains resilient, it rose sharply by 5.4% YoY (Aug: +4.6%). Consequently, its contribution to the overall manufacturing sector rose to 1.6 percentage points (ppts) (Aug: 1.3 ppts). Similarly, the petroleum, chemical, rubber & plastic products grew by 3.8% (Aug: +3.5%), contributing 1.1 ppts (Aug: 1.0 ppts) to the manufacturing growth. The expansion in manufacturing index was associated with improved exports and manufacturing sales. Manufacturing sales grew by 8.2% YoY to RM70.8b (Aug: 8.1%) despite the re-imposition of Sales & Service Tax (SST) in the same month while exports growth rebounded sharply by 6.7% (Aug: -0.3%), thanks to higher E&E receipts.

● The mining index continued its downtrend for the fifth straight month, falling by 6.2% YoY (Aug: -4.6%). The decline was seen across the board as extraction of crude oil & natural gas, crude petroleum and natural gas tumbled by 6.2%, 6.3% and 6.2% YoY respectively in September (Aug: -4.6%, -0.6% and -8.0% respectively). The mining index has fallen by 5.6% YoY in 3Q18 partly due to supply disruption and scheduled maintenance work of refineries. Hence, we expect the sector to weigh down on 3Q18 GDP growth which set to be released this Friday.

● In the first nine months the manufacturing output has moderate to 4.7% YoY compared to 6.5% in the same period the preceding year. However, we see a potential uptick in the 4Q18 albeit trade war continues to dominate the headline. According to the latest IHS Markit survey on October’s manufacturing Purchasing Manager Index (PMI), new export orders from overseas mainly from the US and other countries in South East Asia increased sharply in nine months. We believe the US firms have started to source its imports from South East Asia including Malaysia to avoid the higher tariffs imposed by Trump’s administration on China recently. Hence, we expect manufacturing output mainly the E&E sector continues to expand, but overall growth could turn moderate due to weakness in the mining sector and the adverse impact of SST which could set back the overall expansion.

● Nonetheless, we expect the 3Q18 GDP growth to expand by 5.0% from 4.5% in 2Q18 mainly due to higher private consumption during the tax holiday period. On the back of slowing exports and a higher base, GDP growth is projected to slip to 4.6% in the 4Q18, resulting in 2H18 average growth to tilt lower to 4.8% from 4.9% in the 1H18. Subsequently, we are targeting the 2018 GDP growth to hit 4.8%, much lower than 5.9% in 2017.

Source: Kenanga Research - 12 Nov 2018