IPI growth rebounded in July (+1.2% YoY; Jun: -0.4% YoY), beating the consensus estimate of +1.0% YoY. Growth was driven by increase in manufacturing production (+2.9% YoY; Jun: +4.7% YoY) amid smaller contraction in mining production (-3.0% YoY; Jun: -17.1% YoY). Meanwhile, electricity production declined further (-5.1% YoY; Jun: -2.4% YoY). For now, we maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI growth posted a rebound (+1.2% YoY; Jun: -0.4% YoY) following four consecutive months of decline, beating the consensus estimate of +1.0% YoY. Growth was driven by increase in manufacturing production (+2.9% YoY; Jun: +4.7% YoY), albeit at a slower pace, as well as smaller contraction in mining production (-3.0% YoY; Jun: - 17.1% YoY). Meanwhile, electricity production declined at a steeper pace due to high base effect (-5.1% YoY; Jun: -2.4% YoY) (refer to Figure #1).

On a monthly seasonally adjusted basis, IPI slowed to +0.8% (Jun: +26.2%) as the improvement in mining production (+6.8%; Jun: +3.5%) was partially offset by contraction in manufacturing (-1.1%; Jun: +35.6%) and electricity production (-1.0%; Jun: +6.0%).

Manufacturing production moderated (+2.9% YoY; Jun: +4.7% YoY) amid contraction in domestic-oriented sector and slower growth in export-oriented sector. The contraction in domestic-oriented sector (-0.5% YoY; Jun: +0.3% YoY) was attributed to lower production of non-metallic mineral & metal products (-9.8% YoY; Jun: -14.2% YoY), alongside moderation in ‘food, beverages & tobacco’ (+3.6% YoY; Jun: +10.5% YoY) and ‘transport equipment & other manufactures’ (+9.0% YoY; Jun: +10.7% YoY). The moderation in domestic activity could be due to companies normalising production in anticipation of a sluggish recovery.

Growth in the export-oriented sector slowed (+4.6% YoY; Jun: +6.9% YoY), consistent with slower export performance in July (+3.1% YoY; Jun: +8.0% YoY). ‘Textiles, wearing apparel, leather products & footwear’ production declined at a steeper pace (- 12.9% YoY; Jun: -9.6% YoY), and slowed for ‘electrical & electronics products’ (+9.6% YoY; Jun: +13.2% YoY) as well as ‘wood products, furniture, paper products, printing’ (+0.8% YoY; Jun: +7.3% YoY). ‘Petroleum, chemical, rubber & plastic products’ sustained at +1.5% YoY (Jun: +1.5% YoY).

The decline in mining production eased (-3.0% YoY; Jun: -17.1% YoY) owing to smaller contraction in crude petroleum (-1.2% YoY; Jun: -21.1% YoY) and natural gas production (-4.4% YoY; Jun: -13.5% YoY) due to better operating conditions. On a monthly basis, production of crude petroleum posted a rebound (+6.3%; Jun: -1.2%), while natural gas slowed (+3.0% YoY; Jun: +5.4%).

HLIB’s VIEW

On the global front, the manufacturing sector continued to show signs of improvement in Aug (51.8; Jul: 50.6) as output and new orders gathered momentum. However, new export orders (49.9; Jul: 47.2) remained in contractionary territory, suggesting weak recovery in external demand. While the easing of lockdown measures will continue to support the recovery in the global manufacturing sector, a sluggish recovery is expected as the effects of pandemic continue to linger, leading some countries to maintain social distancing measures or re-impose lockdown measures to contain the spread. 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 - 14 Sept 2020