● Growth contraction in the Industrial Production Index (IPI) eased in May, beating expectation (-22.1% YoY; house estimate: -38.6%; consensus: -29.0%; Apr: -32.0%)

- Mainly due to the relaxation of restrictions on business activities following the implementation of the Conditional Movement Control Order (CMCO) on 4th May. As a result, MoM IPI rebounded to a record high (18.2%; Apr: -30.5%).

- 3-mma: sharpest fall on record (-19.5%; Apr: -10.6%).

● Manufacturing index registered a smaller drop (-23.2%; Apr:- 37.2%), similar to the trendinmanufacturing sales (-19.8%; Apr: -33.0%)

- Led by a softer contraction in the production of electrical & electronic products (-11.2%; Apr: -34.1%), transport equipment & other manufactures (-38.5%; Apr: -69.3%) and non-metallic mineral, basic metal & fabricated metal products (-45.1%; Apr: -62.7%).

- MoM: marked a sharp turnaround (25.9%; Apr: -35.8%).

● Mining index headed further down, matching the decline back in May 2011 (-22.2%; Apr: -19.6%), largelydue to a high base effect

- Broad-based slowdown, led by a larger fall in extraction of crude oil and natural gas (-22.2; Apr: -19.6%). As high base effect dissipates and oil price recovers on a broader reopening of the global economy, we expect the contraction in mining output to ease.

- MoM: recorded a marginal expansion (0.4%; Apr: -19.1%), in line with the modest improvement in global oil price (USD32.4/barrel; Apr: USD26.6).

● Electricity index fell by less (-10.3; Apr: -19.3%) as factories resumed operations

- Expected to rebound further in the coming months as the nation entered another phase of economic reopening under the implementation of the Recovery MCO (RMCO) on 10th June.

● In line with the lifting ofbusiness restriction measures, we expect at least a moderate recoveryforindustrial production in the near term.

- The implementation of the RMCO, stimulus injection under the short-term economic recovery plan (PENJANA), additional monetary easing by the BNM and favourable domestic COVID-19 development are expected to upliftconsumerand business sentiment, translating into a gradual improvement in domestic demand and businesses operations, albeit partially capped by broad weakness in external demand.

- While the relaxation of MCO may have brought some improvement in the manufacturing sector, the impact of COVID-19 pandemic to hit the hardest on the services sector as the fate of air travel and tourism remained bleak. Hence, we maintain our GDP growth estimate of -7.5% for the 2Q20 (1Q20: 0.7%). Similarly, for 2020, we retain our projection of a 7.7% contraction (2019: 3.6%) in the manufacturing production index, consistent with the expected decline in GDP (-2.9%; 2019: 4.3%) for this year.

Source: Kenanga Research - 10 Jul 2020