• IPI growth slowed to 2.2% in August, from +2.6% in July
• The deceleration was led by slowing manufacturing production activities
• As 3Q GDP may have grown between 4.5% and 4.8%

Highlights

Industrial Production Index (IPI) grew at a slower rate of 2.2% y-o-y in August, compared to 2.6% growth in July. YTD, IPI expanded 3.1% y-o-y.

This was mainly driven by expansion across most major sectors: Manufacturing (+4.3%) and Electricity (+4.0%). However, Mining output fell 4.6% during the month.

Within the Manufacturing sector (68.3% index weightage), growth was seen in most subsectors. E&E products grew 4.5% y-o-y, petroleum, chemical, rubber and plastic products expanded 3.5%, and non-metallic mineral products, basic metal and fabricated metal products rose by 4.9%.

In the Mining sector, the index recorded a decline mainly due to a reduction in the production of natural gas by 8.0% y-o-y as well as the fall in the growth of extraction of crude oil and condensates by 0.6%.

Our comments

Overall, August IPI growth came in marginally lower than Bloomberg consensus estimate of 2.3%.

On a seasonally adjusted m-o-m basis, IPI fell 0.4% during the month (July: 2.6%).

The reduction was in line with the August external trade contraction, arising from negative spill-over effects as exports growth continued its moderation trend.

In August, the Manufacturing sector remained resilient despite m-o-m decline in the production of E&E products by 2.6% (July: +0.4%), followed by non-metallic mineral products, basic metal and fabricated metal products’ m-o-m decline by 3.4% (July: +2.6%), while transport equipment and other manufactures grew 6.0% (July: +5.2%).

This month also saw manufacturing sales grew by 8.1% y-o-y to RM70.4bn in August (July: +9.6%), driven by higher sales in refined petroleum products (+7.2%), semiconductor & electronic integrated circuits (+12.0%) and electronic components (+10.6%).

At the same time, salaries paid to manufacturing workers registered a single-digit growth of 9.7% (July: +10.1%) for the first time in 2018, driven perhaps by slower manufacturing output.

On top of that, the manufacturing sector remains positive in the near term, with the Nikkei Malaysia Manufacturing PMI continuing its 10-month high expansion by registering an index of 51.5 in September (August: 51.2), driven by a steady rise in employment.

All in all, we reckon that further escalation of the ongoing trade dispute between the US and its major trading partners will adversely affect Malaysia’s export-oriented manufacturing sector in the long term.

As such, we expect 3Q GDP growth to come in between 4.5% and 4.8%, while reiterating our 2018 GDP growth forecast of 4.8% (2017: 5.9%), in view of the potential moderation in the manufacturing sector in the remaining months of 2018.

Source: Alliance Research - 11 Oct 2018