IPI posted a marginal decline in June (-0.4% YoY; May: -21.6% YoY), faring much better than the -10.4% YoY consensus estimate. Growth was underpinned by rebound in manufacturing production (+4.7% YoY; May: -22.6% YoY) amid smaller contraction in mining (-17.1% YoY; May: -22.2% YoY) and electricity production (-2.4% YoY; May: -10.3% YoY). 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 in 2H20.

DATA HIGHLIGHTS

IPI growth dipped slightly in June by -0.4% YoY (May: -21.6% YoY) under the Recovery MCO, faring much better than consensus estimate of -10.4% YoY. Growth was underpinned by rebound in manufacturing production (+4.7% YoY; May: -22.6% YoY) amid smaller contraction in mining (-17.1% YoY; May: -22.2% YoY) and electricity production (-2.4% YoY; May: -10.3% YoY) (refer to Figure #1). On a monthly seasonally adjusted basis, IPI accelerated by +26.2% (May: +15.3%), driven by the surge in manufacturing (+35.5%; May: +23.2%) and rebound in mining production (+3.5%; May: -3.9%). Electricity production moderated to +6.0% (May: +11.4%).

The rebound in manufacturing production (+4.7% YoY; May: -22.6% YoY) was driven by both domestic and export-oriented sectors, as the economy transitioned into the Recovery MCO. The domestic-oriented sector marginally rebounded by +0.3% YoY (May: -27.8% YoY), aided by the turnaround in ‘food, beverages & tobacco’ (+10.5% YoY; May: -2.5% YoY) and ‘transport equipment & other manufactures’ (+10.7% YoY; May: -38.5% YoY). Meanwhile, non-metallic mineral & metal products declined at a slower pace (-14.3% YoY; May: -45.1% YoY).

The export-oriented sector also rebounded (+6.9% YoY; May: -19.9% YoY), in line with improvement in June’s trade performance (+8.8% YoY; May: -25.5% YoY). Production picked up for ‘electrical & electronics products’ (+13.2% YoY; May: -11.2% YoY), ‘wood products, furniture, paper products, printing’ (+7.1% YoY; May: -39.2% YoY) and ‘petroleum, chemical, rubber & plastic products’ (+1.6% YoY; May: -21.9% YoY), while the decline in ‘textiles, wearing apparel, leather products & footwear’ production eased to -9.6% YoY (May: -45.3% YoY).

The decline in mining production eased to -17.1% YoY (May: -22.2% YoY) following smaller contractions in both crude petroleum (-21.1% YoY; May: -22.2% YoY) and LNG production (-13.5% YoY; May: -22.2% YoY). On a monthly basis, crude petroleum production fell slightly (-1.2%; May: +1.5%), while LNG production rebounded (+5.4%; May: -0.5%).

HLIB’s VIEW

IPI growth was severely impacted in 2Q20 (-17.9% YoY; 1Q20: +0.4% YoY) amid the full quarter of MCO. This is expected to drag on 2Q20 GDP (released on 14th Aug 2020). Manufacturing production is anticipated to improve in the subsequent quarters, in line with the re-opening of economic activities and policy continuity. On the global front, the manufacturing sector returned to expansionary territory at the start of third quarter 2020 (Jul: 50.3; Jun: 47.9) following the revival in output and new orders. However, new export orders remained in contractionary territory (46.9; Jun: 43.5), albeit at a slower rate compared to the previous month. For now, we maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

Source: Hong Leong Investment Bank Research - 10 Aug 2020