OVERVIEW

● The Industrial Production Index (IPI) growth moderated to 1.7% YoY in February (Jan: 3.2%), matching consensus estimate but higher than house estimate of -2.2%, driven by a broad-based decline in output. On a MoM basis, the IPI fell sharply by 11.6% from 1.3% in the preceding month. On a seasonally adjusted basis, the IPI declined by 2.0% MoM (Jan: 1.2%), marking the first contraction in six months.

● Manufacturing output remained resilient as it continued to grow albeit at a slower pace of 3.7% YoY (Jan: 4.2%). It fell sharply by 10.2% MoM (Jan: 1.6%) due mainly to a shorter working month and the Lunar New Year celebration. It was also in line with the weakening external demand observed in key export markets, reflected in 5.3% YoY decline in exports (Jan: 3.1%). Lower output growth was recorded in the electrical and electronics (E&E) sector (3.1% YoY; Jan: 3.9%), and petroleum, chemical, rubber and plastic products (1.6% YoY; Jan: 4.0%). Meanwhile, manufacturing sales slowed for the fourth straight month (5.5% YoY; Jan: 7.0%) led by refined petroleum products which moderated to 4.6% YoY after a brief expansion in January at 12.6%. In the E&E segment, growth in manufacturing sales of diodes, transistor & electronic integrated circuits slowed to 12.8% YoY (Jan: 18.0%) after it peaked in December last year (33.1%).

● Meanwhile, the mining index continues to fall for the second consecutive month. It fell by 5.0% YoY (Jan: -0.9%) and dropped even sharper by 16.2% MoM on the back of a broad-based contraction in extraction of crude oil & natural gas (-5.0%; Jan: -0.9%), crude petroleum output (-4.3%; Jan: -2.2%), and natural gas output (-5.6% YoY; Jan: 0.3%). We expect the index to remain in contraction in the near-term largely due to OPEC+ oil-cuts agreement whereby Malaysia principally agreed to reduce its output to 683,000 barrels per day (bpd) from 709,000 bpd in January.

● The electricity index moderated to 4.9% YoY after a brief spike of 7.8% in January. It fell by a sharp 10.6% MoM (Jan: +3.3%), which came in as no surprise mainly due to shorter working month and factory closures during the Lunar New Year holidays.

● Lacklustre demand continues to weigh on the manufacturing sector. Latest IHS Markit Purchasing Manager's Index (PMI) pointed to weak manufacturing conditions, falling for sixth straight month due to a decline in production as new orders particularly from overseas market continue to soften largely on the impact of the ongoing trade war. Hence, GDP growth is estimated to slow to 4.4% (4Q18: 4.7%) as the industrial activities are dragged down by weak exports of manufacturing goods and sluggish mining output. Going forward, we forecast that GDP growth could edge lower to 4.5% this year from 4.7% in 2018 on the back of slower global growth, as evidenced by slowing highfrequency indicators in key markets including the US, EU and China.

Source: Kenanga Research - 12 Apr 2019