• IPI growth expanded 3.0% in January, from +2.9% in December

• Easing manufacturing growth mainly due to E&E sub-sector

• We reiterate 2018 GDP growth of 5.4%

Highlights

In January, Industrial Production Index (IPI) expanded 3.0% y-o-y, slightly higher than +2.9% in the preceding month.

Growth was led by increase in Mining (+1.5%), Manufacturing (+4.8%) and Electricity (+4.3%) sectors.

Within the manufacturing sector (66% index weightage), E&E products grew 4.0%, Food, Beverages and Tobacco output increased 14.4% and Petroleum, Chemical, Rubber and Plastic Products expanded 2.1% during the month.

In the mining sector, both Extraction of Crude Oil and Condensates and the Production of Natural Gas expanded by 1.8% and 1.5% respectively.

Our comments

Overall, January IPI came in lower than the Bloomberg consensus estimate of 6.8%.

On a seasonally adjusted (SA) m-o-m basis, IPI contracted by 1.0% during the month (Dec17: -0.2%), in-line with our expectation. Growth momentum has been easing as reflected by the 3-months moving averages (Jan17: +3.6%; Dec17: +3.7%; Nov17: +4.4%).

Within the mining sector, growth rebounded by 2.3% on a SA m-o-m basis (Dec17: -2.1%), mainly due to an expansion in the Extraction of crude Petroleum Oils & Condensates subsector, increasing 6.8% m-o-m during the same month (Dec17: +0.3%).

However, the expansion in the mining sector was insufficient to offset the moderation in the manufacturing sector, whereby growth contracted 1.4% on a SA m-o-m basis (Dec17: +0.7%).

In fact, Manufacturing of Electronic Components and Boards and Manufacturing of Consumer Electronics (highest weightage within the E&E segment), has been on a declining trend since Sept17, contracting 4.1% and 13.0% respectively in Jan18.

Meanwhile, Malaysia’s Nikkei manufacturing PMI reverted to 49.9 in February (Jan: 50.5), suggesting signs of moderation in the manufacturing sector, as new manufacturing orders fell.

Furthermore, the strengthening of Ringgit (Jan avg: RM3.96 per USD vs Dec avg: RM4.08 per USD) may have likely caused a negative effect on external demand for Malaysian manufactured goods.

With a slower production in February due to festive seasons and Ringgit strengthening further (Feb avg: RM3.92 per USD), IPI will likely continue to ease in the coming month.

Moving forward, we expect full-year 2018 GDP to expand by 5.4% (2017: +5.9%).

Source: Alliance Research - 14 Mar 2018