IPI growth slowed to +0.3% YoY in Aug (Jul: +1.2% YoY), lower than the consensus estimate of +0.5% YoY. Growth weakened on the back of decline in mining (-6.7% YoY; Jul: -3.0% YoY) and electricity production (-1.2% YoY; Jul: - 5.0% YoY), but remained supported by manufacturing production (+2.4% YoY; Jul: +2.9% YoY). We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI posted slower growth of +0.3% YoY in Aug (Jul: +1.2% YoY), slightly lower than the consensus estimate of +0.5% YoY. Growth weakened due to decline in mining (- 6.7% YoY; Jul: -3.0% YoY) and electricity production (-1.2% YoY; Jul: -5.0% YoY), but remained supported by manufacturing production (+2.4% YoY; Jul: +2.9% YoY) .

On a monthly seasonally adjusted basis, IPI contracted by -0.5% (Jul: +0.9%) as the rebound in electricity production (+2.8%; Jul: -1.0%) was offset by slower mining production (+3.9%; Jul: +6.8%) and continued decline in manufacturing production (- 0.8%; Jul: -1.0%).

Manufacturing production moderated to +2.4% YoY (Jul: +2.9% YoY) as slower growth in the export-oriented sector offset improvement in the domestic-oriented sector. The domestic-oriented sector recorded a rebound (+1.1% YoY; Jul: -0.5% YoY), driven by acceleration in ‘transport equipment & other manufactures’ (+6.9% YoY; Jul: +4.8% YoY) which offset softer growth in ‘food, beverages & tobacco’ (+4.7% YoY; Jul: +6.3% YoY) and decline in non-metallic mineral & metal products (- 6.3% YoY; Jul: -9.8% YoY).

The export-oriented sector recorded lower growth of +3.2% YoY (Jul: +4.7% YoY), owing to decline in production of ‘textiles, wearing apparel, leather products & footwear’ (-11.0% YoY; Jul: -12.9% YoY) and ‘wood products, furniture, paper products, printing’ (-2.5% YoY; Jul: +0.8% YoY), as well as moderation in ‘electrical & electronics products’ (+6.9% YoY; Jul: +9.8% YoY). Meanwhile, production of ‘petroleum, chemical, rubber & plastic products’ picked up (+1.7% YoY; Jul: +1.5% YoY). This was attributed to strong growth in manufactures of pharmaceutical, rubber and plastic products, beneficiaries of the ongoing pandemic. Overall, the production trend was consistent with trade performance in August.

The decline in mining production steepened (-6.7% YoY; Jul: -3.0% YoY), following deeper contraction in crude petroleum (-5.0% YoY; Jul: -1.2% YoY) and natural gas production (-8.0% YoY; Jul: -4.4% YoY) as demand remained on a weak footing. Production was also weaker on a monthly basis, as crude petroleum production slowed to +1.9% (Jul: +6.3%), while natural gas fell -1.1% YoY (Jul: +3.0%).

HLIB’s VIEW

On the global front, the manufacturing sector continued to show an uneven recovery. Manufacturing PMI continued to record an expansion in Sep (52.3; Aug: 51.8) as output and new orders rose for the third consecutive month, while new export orders rose for the first time in over two years. Nevertheless, only 21 out of the 29 nations included in the survey recorded growth in Sep, which suggests global recovery remains uneven. A resurgence of Covid-19 infections in major economies also pose downside risk to the recovery. In Malaysia, the government announced that Kuala Lumpur, Putrajaya (16.4% of GDP) and Selangor (24.2% of GDP) will be on conditional MCO from 14th Oct – 27th Oct 20 and Sabah (6%) on 13th -26th Oct. These  restrictions are expected to limit social activities. Nevertheless, businesses are allowed to operate during this time. We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

Source: Hong Leong Investment Bank Research - 13 Oct 2020