IPI growth plunged to a record low of -32.0% YoY in Apr (Mar: -4.9% YoY), faring much worse than the consensus estimate of -15.4% YoY. This was due to deeper contractions across manufacturing (-37.2% YoY; Mar: -4.1% YoY), mining (-19.6% YoY; Mar: -6.5% YoY) and electricity sectors (-19.2% YoY; Mar: -7.0% YoY) amid the full month of Movement Control Order (MCO). The decline in production is anticipated to ease as more economic sectors reopen under loosening of MCO, followed by a sluggish recovery in 2H20. We maintain our expectation for GDP to contract by -6.0% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI growth plunged by -32.0% YoY in Apr (Mar: -4.9% YoY), way below the consensus estimate of -15.4% YoY. This was the largest slump in growth on record, as production fell across the board at a significant pace during the full month of MCO. Manufacturing nosedived by -37.2% YoY (Mar: -4.1% YoY), while mining (-19.6% YoY; Mar: -6.5% YoY) and electricity (-19.2% YoY; Mar: -7.0% YoY) also declined at faster rates (refer to Figure #1). On a monthly seasonally adjusted basis, IPI also shrank (-27.5%; Mar: - 8.9%) amid lower manufacturing (-33.7%; Mar: -9.6%), mining (-12.5%; Mar: -5.8%) and electricity production (-12.4%; Mar: -12.3%).

The steeper contraction in manufacturing production (-37.2% YoY; Mar: -4.1% YoY) arose from extended weakness in both domestic and export-oriented sectors. Production in the domestic-oriented sector declined by -44.4% YoY (Mar: -9.9% YoY), on the back of sharp drop in ‘transport equipment & other manufactures’ (-69.3% YoY; Mar: -10.1% YoY) and non-metallic mineral & metal products (-62.7% YoY; Mar: -9.8% YoY). Meanwhile, ‘food, beverages & tobacco’ declined at a softer pace (-9.0% YoY; Mar: -9.8% YoY).

The export-oriented sector also contracted sharply (-33.3% YoY; Mar: -1.1% YoY), in line with Apr’s weak exports performance (-23.8% YoY; Mar: -4.7% YoY) following weak global demand and shutdowns in other countries. Double-digit contractions were recorded in ‘textiles, wearing apparel, leather products & footwear’ (-73.8% YoY; Mar: - 1.2% YoY), ‘wood products, furniture, paper products, printing’ (-68.4% YoY; Mar: - 6.1% YoY), ‘electrical & electronics products’ (-34.1% YoY; Mar: -4.9% YoY) and ‘petroleum, chemical, rubber & plastic products’ (-21.4% YoY; Mar: +3.6% YoY).

Mining production sank by -19.6% YoY (Mar: -6.5% YoY) following steeper decline in crude petroleum (-20.2% YoY; Mar: -7.1% YoY) and LNG production (-19.0% YoY; Mar: -6.0% YoY). Similarly, on a monthly basis, both crude petroleum (-19.2%; Mar: +5.6%) and LNG (-18.9%; Mar: +0.2%) declined sharply. The decline in LNG production is expected to continue in the coming months, following PETRONAS’ announcement to optimise its production volume to adapt to low LNG prices and weak demand due to the Covid-19 outbreak.

HLIB’s VIEW

The decline in production is anticipated to ease as more economic sectors resume operations under the Conditional MCO from 4 May-9 Jun and Recovery MCO from 10 Jun-31 Aug, before posting a sluggish recovery in 2H 2020 amid continued weakness in global and domestic demand due to social distancing measures. On the global front, the downturn in manufacturing remained substantial despite PMI increasing to 42.4 in May (Apr: 39.6), as rates of contraction in output, new orders and employment were still among the largest recorded throughout the survey history. As we anticipate recovery to be sluggish and weak, we maintain our expectation for BNM to reduce OPR by another 25bps in 2H 2020.

Source: Hong Leong Investment Bank Research - 12 Jun 2020