OVERVIEW

● The Industrial Production Index (IPI) growth moderated to 2.5% YoY in November (Oct: 4.3%), exceeding Bloomberg consensus of 2.3% and house estimate of 1.4%, on the back of slower output in the mining and the manufacturing sectors. The moderation was more amplified on a MoM basis, as the IPI registered a contraction of -2.8%, after a short-lived gain of 4.8% in the preceding month. On a seasonally adjusted basis, the IPI grew marginally by 0.1% MoM (Oct: +1.7%). Year-to-date, IPI’s YoY growth moderated to 3.1% (2017: 4.5%).

● Manufacturing index registered its lowest YoY growth since April 2016 at 3.6% (Oct: 5.4%), partly due to weakening external demand, particularly from the regional economies (i.e. China, Hong Kong and Singapore) and fading spillovers from a front-loading of US-bound cargoes, in line with a sharp slowdown observed in export growth (1.6% YoY; Oct: 17.7%) and a decrease in manufacturing sales (7.7%; Oct: 10.2%). The moderation observed in the manufacturing index was mainly driven by declining production of food, beverages and tobacco (-2.6%; Oct: 2.6%), and lower increase in production of electrical and electronics (5.3%; Oct: 7.1%), as well as petroleum, chemical, rubber and plastic products manufactures (3.4%; Oct: 4.1%), dragging down their percentage points contribution (ppt) to -0.4 ppt (Oct: 0.3 ppt), 1.5 ppt (Oct: 2.0 ppt) and 1.0 ppt (Oct: 1.2 ppt), respectively.

● The mining index resumed its growth contraction (-0.7% YoY), continuing its five consecutive months of decline after a pause in October (+1.4%), as lower output of crude oil (-0.7%; Oct: 1.4%) and natural gas (-1.8%; Oct: 2.3%) outweighed improvement seen in crude petroleum index (0.6%; Oct: 0.4%). The downward flip came against a backdrop of lower Brent crude oil price, averaging USD64.7/barrel in November (Oct: USD81.0/barrel).

● The moderating growth of IPI correlated with our expectation of a slowdown in manufacturing performance in the near term, particularly for the export-oriented sub-sectors. This is partly based on the IHS Markit PMI Report in December, which reported record-low deterioration of the manufacturing sector, owing to plateauing of both external and domestic demand. On the trade war front, we remain cautiously optimistic on the outcome of the 90-day negotiation period between the US and China, given gradual progress seen through China’s recent pledge to substantially increase imports from the US. As negative impacts from the punitive measures imposed thus far started to emerge, both parties may be incentivised to conclude the ongoing trade talks with some form of resolve or compromise.

● Nonetheless, we maintain our view that GDP growth will edge higher in 4Q18 to 4.8% from 4.4% in the 3Q18, underpinned by strength in private consumption, amid stable labour market condition, continued wage growth and subdued inflation, with whole year 2018 growth estimated to moderate to 4.8% from 5.9% in 2017. As for 2019, GDP growth is projected to trend downward to 4.7%, given signs of waning global demand and commodity prices.

Source: Kenanga Research - 14 Jan 2019