The decline in IPI growth eased to -22.1% YoY in May (Apr: -32.0% YoY), faring better than the consensus estimate of -29.0% YoY. This was owing to slower contractions in manufacturing (-23.2% YoY; Apr: -37.2% YoY) and electricity production (-10.3% YoY; Apr: -19.3% YoY), which offset the steeper decline in mining production (-22.2% YoY; Apr: -19.6% YoY). We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI continued to post a double-digit contraction, albeit at a slower pace in May (-22.1% YoY; Apr: -32.0% YoY) under the Conditional MCO, faring better than consensus estimate of -29.0% YoY. Nevertheless, this remains one of the weakest growths on record. The decline eased on the back of slower contraction in manufacturing (-23.2% YoY; Apr: -37.2% YoY) and electricity production (-10.3% YoY; Apr: -19.3% YoY), which offset weaker growth in mining production (-22.2% YoY; Apr: -19.6% YoY) (refer to Figure #1). On a monthly seasonally adjusted basis, IPI rebounded by +14.6% (Apr: - 27.5%), driven by the sharp increase in manufacturing (+22.1%; Apr: -33.7%) and electricity production (+11.3%; Apr: -12.4%). Mining production contracted at a slower pace (-3.9%; Apr: -12.5%).

The slower decline in manufacturing production (-23.2% YoY; Apr: -37.2% YoY) was aided by both domestic and export-oriented sectors, which saw strong recoveries on a MoM basis as economy moved into the Conditional MCO where most industries were allowed to operate. On an annual basis, the domestic sector still declined, albeit at a slower rate (-27.8% YoY; Apr: -44.4% YoY) following smaller contraction in production of ‘food, beverages & tobacco’ (-2.5% YoY; Apr: -9.0% YoY), ‘transport equipment & other manufactures’ (-38.5% YoY; Apr: -69.3% YoY) and non-metallic mineral & metal products (-45.1% YoY; Apr: -62.7% YoY).

The export-oriented sector also registered a smaller decline (-20.9% YoY; Apr: -33.3% YoY), owing to lower rates of contraction in ‘electrical & electronics products’ (-11.2% YoY; Apr: -34.1% YoY), ‘wood products, furniture, paper products, printing’ (-39.2% YoY; Apr: -68.4% YoY) and ‘textiles, wearing apparel, leather products & footwear’ (- 45.3% YoY; Apr: -73.8% YoY). Meanwhile, the decline in ‘petroleum, chemical, rubber & plastic products’ steepened (-24.3% YoY; Apr: -21.4% YoY).

Mining production dipped further by -22.2% YoY (Apr: -19.6% YoY) following steeper contractions in both crude petroleum (-22.2% YoY; Apr: -20.2% YoY) and LNG production (-22.2% YoY; Apr: -19.0% YoY). However, on a monthly basis, production of crude petroleum marginally rebounded (+1.5%; Apr: -19.2%), while the fall LNG production slowed significantly (-0.5%; Apr: -18.9%).

HLIB’s VIEW

While a recovery in manufacturing production is expected in 2H20, subdued demand due to weak sentiment and reduced factory capacity from worker layoffs during the MCO will remain a drag on domestic manufacturing activity. On the global front, the downturn in the manufacturing sector eased, reflected by the improvement in manufacturing PMI in June (47.8; May: 42.4) as more countries gradually relaxed lockdown measures. The future output index also jumped to 58.7 (May: 52.0), signalling firmer business sentiment going forward. Nevertheless, some countries that opened their economies saw a resurgence of cases, resulting in re-imposition of lockdown. This could potentially delay the recovery of global demand and supply conditions in 2H20. We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY) and for BNM to reduce OPR by another 25bps as early as Sept 2020

Source: Hong Leong Investment Bank Research - 10 Jul 2020