OVERVIEW

● The Industrial Production Index (IPI) grew at a faster pace of 4.2% YoY in October (Sep: 2.3%), exceeding Bloomberg consensus of 3.0% and house estimate of 3.8%, driven by strength in the manufacturing sector and a rebound in the mining sector. Following a similar trend, on a MoM basis, IPI expanded by 4.6% (Sep: -0.3%), after contracting for the past two consecutive months. On a seasonally adjusted basis, the IPI grew 1.7% MoM, reversing the 0.4% decline in October. Year-to-date, the index eased to 3.1% YoY (Jan-Oct 2017: 4.5%).

● Manufacturing index expanded by 5.4% YoY (Sep: 4.8%), its fastest growth since February, in part due to positive spillovers arising from a front-loading of imports by the US prior to the announcement of the 90- day halt to new tariff, hence reflecting a spike in export growth (17.7% YoY; Sep: 6.5%) and an increase in manufacturing sales (10.2%; Sep: 8.2%) in October. The improvement observed in the manufacturing index was mainly propelled by larger production of electrical & electronics (7.1%; Sep: 5.5%), petroleum, chemical, rubber and plastic products (4.1%; Sep: 3.8%), as well as transport equipment and other manufactures (10.1%; 2.3%), pushing up their percentage points contribution (ppt) to 2.0 ppt (Sep: 1.6 ppt), 1.2 ppt (Sep: 1.1 ppt) and 0.7 ppt (Sep: 0.2 ppt), respectively.

● The mining index snapped its five consecutive months of contraction, registering a growth of 1.4% YoY (Sep: - 6.2%), following a broad-based improvement in the output of crude oil (1.4%; Sep: -6.2%), crude petroleum (0.4%; Sep: -6.3%), and natural gas (2.3%; Sep: -6.2%) indices. The positive flip came against a backdrop of higher Brent crude oil price, averaging USD81.0/barrel in October (Sep: USD78.9/barrel). With the recent OPEC’s decision to cut oil production by 1.2m barrels per day for the first six months in 2019, we expect global oil prices to gain some grounds, lending support to the mining index.

● Despite the improvement seen in October, our expectation of a moderation in manufacturing performance going forward, particularly for the export-oriented sub-sectors, remains unchanged. This is partly based on the IHS Markit PMI Report in November, which reported two consecutive months of contraction for the manufacturing sector, as new orders dropped significantly lower. We foresee lower export growth in the coming months as new export orders were weak across regions and as Baltic Dry Index inched lower, pointing towards softer demand for raw materials. Uncertainties with regards to trade activities continue to persist, notwithstanding the temporary de-escalation of trade dispute between the US and China.

● Nonetheless, growth in 4Q18 is expected to edge higher to 4.8% from 4.4% in 3Q18, mainly underpinned by strength in private consumption, amid stable labour market condition, continued wage growth and subdued inflation. Subsequently, for the whole year of 2018, growth is forecasted to moderate to 4.8% from 5.9% in 2017.

Source: Kenanga Research - 13 Dec 2018