IPI recorded worse than expected growth of -4.9% YoY in Mar (Feb: +6.2% YoY; consensus estimate: -3.0% YoY), owing to lower production in mining (-6.5% YoY; Feb: +6.1% YoY), manufacturing (-4.2% YoY; Feb: +6.2% YoY) and electricity sectors (-7.0% YoY; Feb: +6.8% YoY) following the imposition of MCO Phase 1 starting 18 Mar 2020. In 1Q20, IPI growth slowed to +0.4% YoY (4Q19: +1.2% YoY). Production data is expected to deteriorate further in 2Q20 in light of the extension of Conditional MCO (CMCO) until 9 June 2020. We forecast 1Q20 GDP to register weak growth of +0.7% YoY (4Q19: +3.6% YoY).

DATA HIGHLIGHTS

IPI growth declined by -4.9% YoY (Feb: +6.2% YoY), lower than the consensus estimate of -3.0% YoY, as production fell across the board. Mining fell -6.5% YoY (Feb: +6.1% YoY). Manufacturing declined by -4.2% YoY (Feb: +6.2% YoY), while electricity contracted by -7.0% YoY (Feb: +6.8% YoY) (refer to Figure #1). On a monthly seasonally adjusted basis, IPI also declined (-8.9%; Feb: +3.6%), due to mining (-5.8%; Feb: +3.0%) manufacturing (-9.6%; Feb: +3.7%) and electricity production (-12.3%; Feb: +3.5%).

Manufacturing production declined by -4.2% YoY (Feb: +6.2% YoY) due to weakness in both domestic and export-oriented sectors amid factory shutdowns during the MCO. The domestic-oriented sector contracted (-9.9% YoY; Feb: +5.2% YoY) on the back of lower growth in ‘transport equipment & other manufactures’ (-10.2% YoY; Feb: +4.9% YoY), ‘food, beverages & tobacco’ (-9.9% YoY; Feb: +4.4% YoY) and non-metallic mineral & metal products (-9.8% YoY; Feb: +6.2% YoY).

Growth in the export-oriented sector also declined (-1.1% YoY; Feb: +6.7% YoY), dragged by lower production of ‘wood products, furniture, paper products, printing’ (- 6.1% YoY; Feb: +6.3% YoY), ‘electrical & electronics’ (-5.0% YoY; Feb: +7.0% YoY), ‘textiles, wearing apparel, leather products & footwear’ (-1.2% YoY; Feb: +6.7% YoY), as well as moderation in ‘petroleum, chemical, rubber & plastic products’ (+3.6% YoY; Feb: +6.5% YoY).

Mining production posted a -6.5% YoY drop in Mar (Feb: +6.1% YoY) amid lower crude petroleum (-7.1% YoY; Feb: -0.5% YoY) and LNG production (-6.0% YoY; Feb: +12.0% YoY). Meanwhile, on a monthly basis, crude petroleum and LNG production rebounded by +5.6% (Feb: -9.3%) and +0.2% (Feb: -6.0%) respectively. Crude petroleum production is expected to remain low in 2Q20 following Malaysia’s agreement to cut oil production by 136,000 bpd for May and June, as part of the 9.7 million bpd supply cut by OPEC+ to ease a global supply glut amid the Covid-19 pandemic.

HLIB’s VIEW

Following latest economic data releases, we anticipate 1Q20 GDP to be at +0.7% YoY (4Q19: +3.6% YoY). Nevertheless, economic data is expected to weaken further in 2Q20 following the extension of CMCO until 9 June 2020 (bringing MCO period to a total of 84 days). Cautious attitude among consumers and businesses may also limit spending and investment plans. On the global front, manufacturing sector remained weak, reflected by the slump in manufacturing PMI to 39.8 in Apr (Mar: 47.3). While most economic sectors are allowed to operate during the CMCO, economic recovery is expected to be sluggish with social distancing practices likely to remain post-MCO. In line with this, DOSM found that majority of survey respondents have changed their lifestyle and are prepared to maintain this new lifestyle post-MCO, which includes limiting social activities (83.3%) and dining out (43.5%). Hence, we maintain our expectation for Malaysia’s GDP to weaken to -6.0% YoY in 2020 (2019: +4.3% YoY).

Source: Hong Leong Investment Bank Research - 13 May 2020