OVERVIEW

● The Industrial Production Index (IPI) expanded by 3.4% YoY in December (Nov: +2.6%), beating consensus and house estimate of 2.8% and 0.4% respectively, underpinned by sharp expansion of output in the manufacturing and mining sectors. On a MoM basis, the IPI rebounded by 1.5% after it fell by 2.7% in November. On a seasonally adjusted basis, the IPI declined by 1.6% MoM (Nov: +0.2%). Overall, IPI’s YoY growth moderated to 3.1% in 2018 (2017: +4.3%).

● The manufacturing index grew by 4.4% YoY in December (Nov: +3.7%) driven by an expansion in electrical & electronics products (E&E), and petroleum, chemical, rubber & plastic products by 7.2% and 3.6% YoY respectively. Combined, the two sub-sectors contributed 3.1 percentage points (ppt) to the manufacturing sector’s YoY growth. Additionally, we believe the recovery in exports and manufacturing sales which rose to 4.8% and 7.5% YoY respectively in December (Nov: +1.6% and +7.7% respectively) have contributed to the manufacturing sector’s expansion in the final month of 2018. For 2018, coupled with a weak external demand and the impact of the US-China trade war, the manufacturing growth moderated to 4.8% YoY from 6.1% recorded in 2017.

● Looking forward, we expect manufacturing activity to moderate in the 1Q19 due to the impact of US-China trade war, and prospect of a growth slowdown in China and Euro Zone economies evidenced by the latest manufacturing PMI reading which continued its downtrend for the fourth straight month in January to 47.9 (Dec: 46.8). Further weighing on manufacturing growth was a sharp slowdown in the export growth of the top three destinations namely Singapore, China and US. Combined, exports to the three destinations slowed sharply to 5.3% for 2018 (2017: +19.4%), while its total share of Malaysia’s exports slipped to 36.9% from 37.5% in 2017.

● Meanwhile, the mining index rebounded by 1.0% YoY in December from a contraction of 0.7% in the preceding month, thanks mainly to a sharp expansion in extraction of crude oil & natural gas, and crude petroleum which rose to 1.0% and 2.5% YoY respectively (Nov: -0.7% and +0.6% respectively). Overall, the mining index declined by 1.9% YoY in 2018 (2017: -0.1%) as a result from supply cut lead by the Organisation of the Petroleum Exporting Countries (OPEC) to curb a supply overhang in 2018.

● A stronger 4Q18 is a possibility, as the IPI grew by 3.5% YoY (3Q18: +2.4%) evidenced by resilience growth in the manufacturing index (4.5% Vs 4.8% in 3Q18) and a mild rebound in the mining index. Hence, we maintain our view that GDP growth could expand in 4Q18 to 4.8% from 4.4% in the 3Q18, underpinned by robust export growth of 8.0% in 4Q18 (3Q18: +5.1%), strength in private consumption, amid stable labour market condition, continued wage growth and subdued inflation. Nonetheless, 2018 GDP growth is estimated to moderate to 4.8% from 5.9% in 2017. Given signs of waning global growth, GDP growth is projected to continue to moderate to 4.7% in 2019.

Source: Kenanga Research - 12 Feb 2019