IPI growth rose by +1.0% YoY in Sep (Aug: +0.2% YoY), below the consensus estimate of +2.3% YoY. Growth was underpinned by manufacturing production (+4.3% YoY; Aug: +2.2% YoY), while mining (-9.6% YoY; -6.7% YoY) and electricity production (-2.1% YoY; Aug: -1.1% YoY) declined at a faster pace. In 3Q20, IPI marginally rebounded by +0.8% YoY (2Q20: -17.9% YoY). We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI growth quickened to +1.0% YoY in Sep (Aug: +0.2% YoY), lower than the consensus estimate of +2.3% YoY. Growth was underpinned by manufacturing production (+4.3% YoY; Aug: +2.2% YoY) amid further decline in mining (-9.6% YoY; - 6.7% YoY) and electricity production (-2.1% YoY; Aug: -1.1% YoY) (refer to Figure #1). In 3Q20, IPI marginally rebounded by +0.8% YoY (2Q20: -17.9% YoY).

On a monthly seasonally adjusted basis, IPI rebounded by +1.0% (Aug: -0.6%), driven by turnaround in manufacturing (+1.6%; Aug: -1.1%) which offset moderation in electricity (+2.2%; Aug: +2.9%) and decline in mining production (-3.3%; Aug: +3.9%).

Manufacturing production accelerated to +4.3% YoY (Aug: +2.2% YoY) owing to stronger growth in both export and domestic-oriented sectors. The domestic-oriented sector grew +1.4% YoY (Aug: +0.2% YoY) on increased production of ‘food, beverages & tobacco’ (+4.9% YoY; Aug: +4.8% YoY) and ‘transport equipment & other manufactures’ (+4.5% YoY; Aug: +3.5% YoY). ‘Non-metallic mineral products, basic & fabricated metal products’ declined at a slower pace (-3.9% YoY; Aug: -6.3% YoY).

The export-oriented sector posted stronger growth of +5.7% YoY (Aug: +3.3% YoY), led by ‘electrical & electronics products’ (+9.8% YoY; Aug: +7.1% YoY), consistent with the pickup in global semiconductor sales during the month (+5.8% YoY; Aug: +4.9% YoY). Production also increased for ‘petroleum, chemical, rubber & plastic products’ (+3.2% YoY; Aug: +1.7% YoY) and ‘wood products, furniture, paper products, printing’ (+2.3% YoY; Aug: -2.5% YoY). Meanwhile, ‘textiles, wearing apparel, leather products & footwear’ registered a smaller decline (-4.1% YoY; Aug: - 11.0% YoY).

Production in the mining sector continued to weaken (-9.6% YoY; Aug: -6.7% YoY), following deeper contraction in crude petroleum (-9.7% YoY; Aug: -5.0% YoY) and natural gas production (-9.5% YoY; Aug: -8.0% YoY). Production was also weaker on a monthly basis, as lower production was seen for crude petroleum (-4.7%; Aug: +1.9%) and natural gas (-3.6%; Aug: -1.1%).

HLIB’s VIEW

On the global front, manufacturing PMI increased to 53.0 (Sep: 52.4) due to stronger new order intakes, while business optimism rose to its highest level since May 2018. In Malaysia, while 3Q20’s IPI recovered from the trough in 2Q20, only the manufacturing sector saw a turnaround. Mining and electricity production continued to fall, albeit by a smaller magnitude. As the CMCO has been extended to all states except for Perlis, Pahang and Kelantan for four weeks until 6th Dec 2020, 4Q20 is expected to see renewed weakness in economic activity. Based on Google Mobility data, mobility in retail and creation has declined by -31% compared to baseline on 3rd November (trough: -84% in Apr 20). We maintain our expectation for GDP to contract by -5.0% YoY in 2020 (2019: +4.3% YoY).

Source: Hong Leong Investment Bank Research - 16 Nov 2020