• IPI growth expanded strongly by 2.6% in July versus +1.1% in June

• Manufacturing production growth normalized after festive month

• Maintain 2018 GDP growth forecast of 4.8%

Highlights

Industrial Production Index (IPI) grew 2.6% y-o-y in July, higher than the 1.1% growth in June. YTD, IPI expanded 3.2% y-o-y.

On y-o-y basis, IPI growth was supported by expansion across most major sectors: Manufacturing (+5.2%) and Electricity (+4.5%). In contrast, Mining output fell 5.9% during the month.

Within the manufacturing sector (68.3% index weightage), growth was seen in most subsectors. E&E products grew 8.0% y-o-y, Petroleum, Chemical, Rubber and Plastic Products expanded 4.0%, Transport Equipment and Other Manufactures grew 13.5%. However, Food, Beverages and Tobacco fell 2.9%.

In the mining sector, the three consecutive months of contraction was due to a continuous fall in Production of Natural Gas of 15.2% y-o-y, offsetting the rebound in the growth of Extraction of Crude Oil and Condensates by 4.5%.

Our comments

Overall, July IPI growth came in higher than Bloomberg consensus estimate of 1.4%.

On seasonally adjusted m-o-m basis, IPI grew 2.6% during the month (June: -1.0%). The growth was in tandem with July external trade growth, indicating a recovery in production activities after plunging in June as a result of festive holidays.

In July, manufacturing sector remained strong, supported by continuous growth in the production of E&E products of 0.4% m-o-m (June: +6.0%), Transport Equipment and Other Manufactures grew 5.2% (June: +1.0%), Non-metallic Mineral Products, Basic Metal and Fabricated Metal Products expanded 2.6% (June: +2.4%).

In fact, manufacturing sales grew by 9.6% y-o-y to RM70.0bn in July (Jun: +7.8%), driven by higher sales in refined petroleum products (+3.5%), semiconductor & electronic integrated circuits (+19.1%) and electronic components (+12.2%).

At the same time, salaries paid to manufacturing workers registered a double digit growth of 10.1% for the seventh consecutive month, signaling a healthy expansion within the manufacturing sector.

Looking forward, the manufacturing sector remains positive in the near term, with the Nikkei Malaysia Manufacturing PMI rebounding into expansionary territory for the first time since Jan 18, registering an index of 51.2 in August (July: 49.7) which was mainly due to higher output and new orders.

We believe that further escalation of the ongoing trade war between US and its major trading partners will adversely affect Malaysia’s export-oriented manufacturing sector, especially the E&E sub-sector, due to spillover effect of a disruption in global trade flow. That said, that scenario is not our base case yet. Notwithstanding an expected slowdown in public expenditure and investment, the Malaysian economy is expected to remain resilient which is underpinned by the rebound in private consumption and sustained export growth. As such, we reiterate our 2018 GDP growth forecast of 4.8% (2017: 5.9%).

Source: Alliance Research - 7 Sept 2018