Continued Fall in November Production Supports Call For Technical Recession in 1Q09 and at least 75bps more of OPR cuts in 1H09

January 12, 2009 at 6:59 am Leave a comment

Announced: Friday, 9 January at 12:01 pm (Malaysia time)
Industrial Production (%YoY) – Actual, Forecast: -8.0%, Consensus: -6.1%,
Previous: -3.2%

Bottom line
The deeper fall in November IP does not bode well for 4Q08 GDP. The data is consistent with recent weak export numbers seen in other regional tech exporters including Korea and Taiwan. The sustained contraction in IP, alongside signs that services and construction activity is softening, raises the possibility that 4Q08 GDP growth could slow to just to 2% or even under from a year ago, and contract on a quarter-on-quarter, seasonally adjusted basis. With economic weakness likely to intensify in 1Q09, we have slashed our 2009 GDP growth forecast to 0.5% (from 3.1%) and now expect a technical recession in 1Q09 (i.e., two consecutive quarters of quarter-on-quarter contraction)1. This sets the stage for more aggressive policy response. A fiscal stimulus package is set to be announced within the next 2-3 months, but the government’s generosity is capped by the fiscal deficit, which could exceed 5% of GDP even without additional stimulus. Consequently, monetary policy may have to take on a larger burden. We expect at least a further 75bps cut in the OPR in 1H09, but we see the increasing chance that the OPR could fall 100-125bps from current levels instead.

In brief
Industrial production (IP) fell for the third consecutive month by 7.7% in November from a year ago, declining further from the 2.9% fall recorded in October. This was worse than market expectations for a 6.5% drop, and close to our forecast for an 8% fall, and was the sharpest fall since 2004. On a month-on-month basis, IP also fell by 3.1% (seasonally unadjusted) and 2.4% (using X-12 seasonal adjustment) – the fourth consecutive month of decline.
The decline in IP was broad based across all three sub-sectors. Manufacturing (-9.4% versus -3.8% in October), mining (-2.8% versus -5.5%in October) and electricity (- 2.8% versus -1.6% in October) production all contracted and underperformed compared to October.
The drop in manufacturing production was largely due to double digit declines in electronics segments, namely office accounting and computing machinery (-23.0%) and electronic valves and tubes and other electronic components (-12.8%). Production of refined petroleum products (-10.3%) also fell. Mining output, on the other hand were dragged by decreases in production of crude oil (-1.7%), and natural gas (-4.7%). The sharper fall in electricity production could perhaps be an indication of broader weakness beyond manufacturing.

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