IPI growth continued to moderate to +4.1% YoY in May (Apr: +4.6% YoY), missing consensus expectations of +6.2% YoY. The moderation was attributed to a steeper decline in mining production (-4.9% YoY; Apr: -0.1% YoY), which offset the pickup in both manufacturing (+6.9% YoY; Apr: +6.2% YoY) and electricity production (+2.8% YoY; Apr: +1.5% YoY).

DATA HIGHLIGHTS

IPI growth continued to moderate to +4.1% YoY in May (Apr: +4.6% YoY), missing consensus expectations of +6.2% YoY. Mining production registered a steeper contraction (-4.9% YoY; Apr: -0.1% YoY), which offset the pickup in both manufacturing (+6.9% YoY; Apr: +6.2% YoY) and electricity production (+2.8% YoY; Apr: +1.5% YoY) (refer to Figure #1).

On a monthly seasonally adjusted basis, IPI sank (-2.9%; Apr: +0.03%) following a downturn in mining (-4.4%; Apr: +1.9%) and continued decline in manufacturing (-2.5%; Apr: -0.3%), offsetting the marginal rebound in electricity production (+0.5%; Apr: -1.1%).

The manufacturing index accelerated to +6.9% YoY (Apr: +6.2% YoY), supported by stronger growth in the domestic-oriented sector, as well as steady growth in the export oriented sector. Export-oriented sector growth (+6.8% YoY; Apr: +6.8% YoY) was consistent with positive exports momentum during the month (+30.5% YoY; Apr: +20.8% YoY). Within the sector, stronger production was recorded for E&E products (+15.5% YoY; Apr: +14.2% YoY), mainly on manufacture of computer, electronics and optical products. ‘Textiles, wearing apparel, leather products & footwear’ (+5.0% YoY; Apr: +4.7% YoY) also accelerated. These offset both the moderation in ‘wood products, furniture, paper products & printing’ (+8.1% YoY; Apr: +10.1% YoY) and the continued decline in ‘petroleum, chemical, rubber & plastic products’ (-1.8% YoY; Apr: -1.2% YoY).

Meanwhile, production in the domestic-oriented sector picked up (+6.9% YoY; Apr: +5.0% YoY), driven by stronger growth in ‘transport equipment & other manufactures’ (+12.4% YoY; Apr: +5.8% YoY) which saw a jump in motor vehicle production (+14.4% YoY; Apr: +5.1% YoY), as well as higher growth for ‘non-metallic mineral products, basic & fabricated metal products’ (+5.2% YoY; Apr: +5.1% YoY). Production for ‘food, beverages & tobacco’ (+4.7% YoY; Apr: +4.3% YoY) also saw an increase.

Mining production continued to decline (-4.9% YoY; Apr: -0.1% YoY) on the back of weaker crude petroleum (-6.7% YoY; Apr: -0.8% YoY) and natural gas production (-3.6% YoY; Apr: +0.3% YoY). On a monthly basis, both crude petroleum (-0.7%; Apr: -3.2%) and natural gas (-0.5%; Apr: -6.8%) also saw a decrease in production, albeit at a slower pace.

HLIB’s VIEW

On the global front, manufacturing PMI edged lower in Jun (52.2; May: 52.3), weighed by contraction in new export orders amid lower international trade flows. Headwinds from supply chain disruptions, elevated inflationary pressures and prolonged geopolitical tensions continue to cloud the global manufacturing landscape. For Malaysia, the transition to endemicity is expected to support the domestic-oriented manufacturing industries. We maintain our expectation for BNM to raise OPR by another 25bps in Sep, bringing OPR to 2.5% by end-2022.

Source: Hong Leong Investment Bank Research - 12 Jul 2022