● Industrial Production Index (IPI) growth slowedconsiderably in June (1.4%; May: 26.1%), below house forecast but beating market expectations (KIBB: 3.5%; consensus: -1.0%)

− Growth was underpinned by an expansion in the mining index, despite a contraction in manufacturing and electricity. The moderation reflects the impact of the ongoing Full Movement Control Order (FMCO) but was largely attributable to a higher base from last year.

− MoM (1.6%; May: -0.2%): first expansion in three months.

− 2Q21 (22.6%; 1Q21: 3.9%): surged to a record high YoYbut declined on a QoQ basis (-1.6%; 1Q21: 0.2%).

● Manufacturingoutput plunged to a 13-month low (-0.2%; May: 29.8%), in line with lower manufacturing sales growth (6.5%; May: 37.2%) and a moderation in exports (27.2%; May: 47.0%), but largely as the low base effect dissipates

− Attributable to a broad-based YoY slowdown in all subsectors, driven by a contraction in the production of transportation equipment & other manufactures (-42.7%; May: 68.9%), and non-metallic mineral, basic metal & fabricated metal products (-21.3%; May: 49.4%), as well as a moderation in output of petroleum, chemical, rubber & plastic products (19.0%; May: 34.8%) and electrical & electronic products (8.4%; May: 21.6%).

− MoM (5.4%; May: -2.0%): rebounded for the first time in three months backed by export-oriented industries.

● Mining index growth moderated to 10.3% (May: 20.7%), still indicative of a lingering low base effect

− Due to a broad-based slowdown, led by a moderation in extraction of crude oil & natural gas (10.3%; May: 20.7%), followed by declining natural gas production (13.4%; May: 30.9%), and lower crude petroleum output (6.3%; May: 8.6%); this comes despite higher global oil prices in June (USD73.2/barrel; May: 68.5/barrel).

− MoM (-6.4%; May: 6.0%): it sharply fell to a 4-month low, amid the impact of MCO measures.

● Electricity index plummeted to -4.8% (May: 8.8%), its lowest level in 4 months

− MoM (-12.3%; May: 0.2%): biggest contraction in 14 months, due to limited operational capacity during the MCO.

● 2021 manufacturing production forecast retained at 5.5% (2020: -2.7%) on sustained export demand

− Our estimate for 2Q21 GDPgrowth at 11.7% (1Q21: -0.5%) would mainly be supported by the manufacturing sector’s 2Q21 record breaking 26.3% YoY growth, backed by external demand.

− Despite the impact of the prolonged FMCO, which has weighed on domestic demand, we expect manufacturing output to remain supported by export industries, on the back of solid external demand. Furthermore, manufacturing production will likely recover over 2H21 as restriction measures are gradually eased; MCO relaxations for those fully vaccinated and for economic sectors will continue to be announced in the near-term. Nevertheless, downside risks persist as COVID-19 cases remain elevated as the highly infectious Delta variant continues to spread.

− Given the worsening domestic COVID-19 condition and the extended FMCO measures, we have revised down our 2021 GDP growth forecast to 4.0 - 5.0% from 5.0 - 6.0% previously (2020: -5.6%).

Source: Kenanga Research - 11 Aug 2021