• IPI growth expanded 2.3% in September, from 2.2% in August

• Resilient manufacturing production offset by slowing mining output

• We expect 3Q GDP growth to expand at 4.6%, 2018 GDP growth at 4.8%

Highlights

Industrial Production Index (IPI) grew marginally faster at 2.3% y-o-y in September, compared to 2.2% growth in August. YTD-Sept, IPI expanded 3.0% y-o-y.

This was mainly driven by expansion across most major sectors: Manufacturing (+4.8%) and Electricity (+4.2%). However, Mining output contracted 6.2% during the month.

Within the Manufacturing sector (68.3% index weightage), growth was seen in most subsectors. E&E products grew 5.5% y-o-y, Petroleum, Chemical, Rubber and Plastic Products expanded 3.8%, and Food, Beverages and Tobacco Products rose by 6.9%.

In the Mining sector, the index contracted mainly due to a reduction in the Production of Natural Gas by 6.2% y-o-y, as well as the fall in the growth of Extraction of Crude Oil and Condensates by 6.3%.

Our comments

Overall, September IPI growth came in line with Bloomberg consensus estimate of 2.3%.

On a seasonally adjusted m-o-m basis, IPI fell 0.4% for the second consecutive month (Aug: - 0.4%), signalling a potential moderating growth trend in Malaysia’s industrial production, particularly the mining sector.

During the month, the Manufacturing sector grew at a stagnant pace as the 3 months moving average showed a steady growth of 4.8% (Aug: +4.7%). On a m-o-m basis, production of E&E Products expanded by 3.3% (Aug: -2.6%), while production of Petroleum, Chemical, Rubber and Plastic Products grew by 1.8% (Aug: -1.5%).

Meanwhile, manufacturing sales grew by 8.2% y-o-y to RM70.8bn in September (Aug: +8.1%), driven by higher sales in refined petroleum products (+11.2%), semiconductor & electronic integrated circuits (+12.6%), as well as electronic components (+8.4%).

However, the Nikkei Malaysia Manufacturing PMI fell into bearish territory at 49.2 during October (Sept: 51.5), in-line with the trend of global PMI and other major countries such as US, China and Singapore. This was mainly due to a reduction in total sales as demand eased domestically impacted by the implementation of Sales and Services Tax (SST) . In the Budget 2019, the government guided that the Manufacturing Production Index will likely come in lower at 4.9% y-o-y in 2018 (2017: +6.5%), and likely to remain steady around 4.7% in 2019, particularly on the E&E sector.

Overall, we expect that further escalations of the ongoing trade disputes between the US and its major trading partners will adversely affect and dampened Malaysia’s export-oriented manufacturing sector in the short run. However, the country may benefit from it in the medium term if multinational corporations decide to relocate some of its production lines to Malaysia, since Malaysia is yet to be subjected to direct tariffs or sanctions from US.

Nevertheless, we expect 3Q GDP growth to come in slightly higher at 4.6% (2Q18: +4.5%) due to the tax holidays, 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 - 9 Nov 2018