● Industrial Production Index (IPI) moderated in December (1.3% YoY; house estimate: 2.6%; consensus: 2.0%; Nov: 2.1%)

- Mainly attributed to a contraction in the mining index and a high base a year ago.

- MoM: rebounded after a sharp decline in the previous month (0.7%; Nov: -1.0%).

- Overall, 2019 growth softened to 2.4% YoY (2018: 3.0%) in line with house expectation of growth slowdown.

● Manufacturing index rose (3.4%; Nov: 2.7%) in line with a jump in manufacturing sales (5.2%; Nov: 2.5%)

- Led by improvement in the production of electrical and electronic products (E&E) (3.1%; Nov: 1.1%), followed by petroleum, chemical, rubber & plastic products (3.6%; Nov: 2.7%). Meanwhile output of food, beverages & tobacco soften to 0.6% (Nov: 2.2%), a 12-month low.

- MoM: rebounded after a contraction in the preceding month (1.2%; Nov: -2.6%)

● Mining index back in the negative territory (-4.9%; Nov: 0.5%) on a broad-based decline of its sub components

- Led by a sharp decline in extraction of crude oil & natural gas (-4.9%; Nov: 0.5%), followed by natural gas output (-3.4%; Nov: 3.7%) and crude petroleum (-6.6%; Nov: -3.3%). Going forward, we expect the mining industries slowdown to persist on the back of the OPEC+ output cut, which would extend until March 2020 and slowing demand from China. Of note, the average Brent crude oil price in December rose to USD65.4/barrel from USD62.7/barrel in November.

- MoM: The mining index fell by 0.9% after it recorded two straight months of MoM gain.

● The electricity index rose to 3.3% (Nov: 1.6%), mirroring seasonal pick up in manufacturing activities

● 4Q19 growth slowed. Given that the IPI (1.3%; 3Q19: 1.6%) and manufacturing (2.8%; 3Q19: 3.4%) output growth slowed in 4Q19, it reaffirmed our 4Q19 GDP growth estimate of 4.0%, slower than the 3Q19’s 4.4%.

● Industrial production to remain soft in the immediate term, but with a potential recovery in the 2H20

- Mainly attributable to the disruption in the supply value chain due to the increasing number of factory shutdown in China following the impact of the coronavirus outbreak. This will weigh on the domestic manufacturing sector in the immediate term. Nevertheless, the house expects the manufacturing sector to gradually recover in the 2H20 on a projected upturn in the tech sector, lagged impact from the recent cycle of monetary easing and expansionary fiscal measures.

- Meanwhile, headwinds remain surrounding the US-China trade negotiation despite the phase one deal, and potentially weaker growth trajectory of major economies.

- Overall, the manufacturing IPI is expected to moderate slightly to 3.1% in 2020 (2019: 3.6%) in line with house forecast of a slower GDP growth at 4.3% (2019F: 4.5%).

Source: Kenanga Research - 10 Feb 2020