OVERVIEW

● The Industrial Production Index (IPI) growth moderated to 3.2% YoY in January (Dec: 3.4%), exceeding consensus and house estimate of 2.3% and 1.1% respectively, on the back of lower output in the manufacturing and mining sectors. Similarly on a MoM basis, the IPI growth tapered to 1.3% from 1.5% in the preceding month. On a seasonally adjusted basis, the IPI grew by 1.2% MoM, registering above December’s 0.2%.

● The manufacturing index expanded at a slower pace of 4.2% (Dec: 4.4%), partly due to weakening external demand, particularly from the US and the regional economies (i.e. Hong Kong and Singapore), in line with a slowdown observed in export growth (3.1% YoY; Dec: 5.1%) and a third successive month of decrease in manufacturing sales (7.0%; Dec: 7.5%). The moderation observed in the manufacturing index was singlehandedly driven by slower output of electrical and electronics (3.9%; Dec: 7.2%), as demand for thermionic valves & tubes, photocells and integrated circuits softened, dragging down its percentage points contribution (ppt) to a 13-month low of 1.1 ppt (Dec: 2.0 ppt).

● Meanwhile, the mining index reversed into contraction of 0.9% YoY after a brief uptick of 1.0% in the previous month, as declines in extraction of crude oil & natural gas (-0.9%; Dec: 1.0%) and crude petroleum output (-2.2%; Dec: 2.5%) outweighed the rebound observed in the natural gas index (0.3%; Oct: -0.2%). The downward flip of the overall mining index came on the back of a sharper drop in the average Brent crude oil price (-14.0%; Dec: -12.1%).

● Bucking the trend, the electricity generation index spiked up to an 18-month high of 7.8% YoY (Dec: 2.7%), potentially reflecting heightened electricity consumption due to higher usage of air-conditioner amid the heat wave in January, in which weather expert from Malaysian Meteorological Department said could have been brought by changes in wind directions in the region influenced by the Pabuk tropical storm in Thailand.

● 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 February that the manufacturing sector contracted for the fifth straight month, owing to lower production and lacklustre demand. New export orders experienced a decline, particularly as orders from the Asian regions slowed. On the trade war front, tensions persist, though we remain cautiously optimistic following the extension of the US-China trade negotiation deadline beyond the initial date of 1st March.

● Coupled with a slowing growth momentum in domestic demand, we project GDP growth to slow to 4.4% in the 1Q19 (4Q18: 4.7%). For the whole of 2019, we maintain our view that GDP growth could edge lower to 4.5% from 4.7% previously, given strengthened prospect of cooling global growth, as evidenced by dwindling highfrequency indicators in key markets including the US, EU and China.

Source: Kenanga Research - 15 Mar 2019