● Industrial Production Index (IPI) growth moderated in May (26.0%; Apr: 50.1%), beating house forecast but slightly below market expectations (KIBB: 19.7%; consensus: 28.0%)

• Attributable to the impact of Movement Control Order (MCO) 3.0 on domestic demand, amid higher local COVID19 cases. Growth is still reflective of last year’s lower base.
• MoM (-0.3%; Apr: -4.4%): second consecutive month of contraction, albeit smaller than the previous month.

● Manufacturing index growth softened to 29.8% (Apr: 68.0%), in tandem with a moderation in exports (47.3%; Apr: 63.0%) and manufacturing sales growth (37.2%; Apr: 72.5%); still primarily reflective of a lower base in May 2020

• Driven by a broad-based moderation in YoY growth among all subsectors, led by slower growth in the production of electrical & electronic products (21.6%; Apr: 70.1%), transportation equipment & other manufactures (68.9%; Apr: 275.2%), and non-metallic mineral, basic metal & fabricated metal products (49.4%; Apr: 141.0%)
• MoM (-2.0%; Apr: -4.3%): declined for the second straight month, albeit at a slower pace.

● Mining index expanded for the second consecutive month (20.7%; Apr: 14.3%), reaching its highest level since May 2003

• Broad-based expansion led by greater extraction of crude oil & natural gas (20.7%; May: 14.3%), followed by growing natural gas production (30.9%; May: 23.9%), and an increase in crude petroleum output (8.6%; Apr: 2.7%); supported by higher global oil prices in May (USD68.5/barrel; Apr: USD64.8/barrel).
• MoM (6.0%; Apr: -5.7%): rebounded to a 2-month high, after plummeting last month.

● Electricity index growth moderated to 7.9% (Apr: 23.6%), and still underpinned by a low base effect

• MoM (-0.6%; May: -2.9%): second month of contraction, although smaller than the previous month.
• Expected to remain pressured in the near-term due to limited operational capacity during the ongoing MCO.

● 2021 manufacturing production forecastrevised down to5.5% from9.2% (2020: -2.7%) given the impact of extended lockdown measures and a worsening local COVID-19 condition

• Manufacturing output will likely continue to be moderately impacted by the extended MCO, which may be further exacerbated with several areas of Malaysia having been placed under a stricter Enhanced MCO. However, manufacturing production is expected to recover over 2H21, as MCO measures are eventually relaxed and as COVID-19 vaccinations progress, which would improve domestic demand. Additionally, external demand will likely rebound as major trading partners continue to reopen and overcome concerns regarding the Delta variant.
• Against this backdrop, we have revised down our 3Q21 GDP growth forecast to 6.4% from 6.9%, whilst our 2Q21 and 2021 GDP projections remain at 11.7% and 5.0% - 6.0% (2020: -5.6%), respectively.

Source: Kenanga Research - 12 Jul 2021