Industrial output rebounds in May as more industries resume

KUALA LUMPUR: The industrial production index (IPI) rebounded by 18.2% in May from a month ago as the government allowed more industries to resume operations under the movement control order and economists expect further recovery, according to the Statistics Department.

Chief Statistician Datuk Seri Dr Mohd Uzir Mahidin said the rebound in the May IPI was due to the increase in all indices. The manufacturing index surged 25.9%, electricity was up by 13.7% and mining edged up by 0.4%

However, the IPI tumbled 22.1% in May from a year ago, but the decline was less severe when compared with a Bloomberg survey of a 29% fall.

“Deterioration of IPI in May 2020 was due to the significant decline in all indices; index of manufacturing (23.2%), index of mining (22.2%) and index of electricity (10.3%),” said the Statistics Department.

The Statistics Department said the output of the manufacturing sector in May contracted by 23.2% on-year basis after plunging 37.2% in April 2020.

The main sub-sectors contributing to the decrease in manufacturing sector were non-metallic mineral products, basic metal and fabricated metal products (45.1%); transport equipment and other manufactures (38.5%) and petroleum, chemical, rubber and plastic products (24.3%).

The output in the mining sector dropped 22.2% in May from a year ago. The deterioration was due to the decrease in crude oil and condensate index (22.2%) and natural gas index (22.2%). As for the electricity sector, its output fell by 10.3% in May from a year ago.

ING Global Economics said the 22.1% drop in May IPI was on top of the 32% year-on-year fall in April.

“The good news is that this was less negative than the consensus view at -29% (and our -30% forecast) and that output, bounced 18% on the month, clawing back some of April’s 30.5% month-on-month fall.

“The IPI performance contrasts with exports where the year-on-year decline deepened in May (to -25.5% vs -23.9% in April) and month-on-month growth continued to be negative (at -3.2% vs. -19.1%).

“This suggests that manufacturing probably drew its strength more from domestic demand, thanks to the relaxation of Covid-19 movement control orders (MCO) at the start of May,” it said.

ING said manufacturing sales growth, the proxy for retail sales that serves as a guide to domestic spending, recovered in May to -19.8% y-o-y from -33% y-o-y in April (up 19% on-month). There was also some momentum seen in jobs and wage growth.

“We could see further manufacturing recovery in June, with the further reopening of the economy.

“Even so, it’s unlikely to be enough to pull annual growth into positive territory just yet, and probably not for the rest of the year either, even if month-on-month growth reverts to behaving in line with the average of recent years.

“We estimate a 20% IPI contraction in Q2, which supports our view of an 8.2% y-o-y GDP contraction – the largest since the 1998 Asian Financial crisis.

“A possible bigger hit to services activity tips the balance of risk more to the downside than to the upside. Persistently weak exports, standstill tourism, and anaemic domestic demand combine to keep continued negative GDP growth as the baseline for the second half of the year. Our full-year GDP growth forecast for 2020 is -3.9%,” ING said.

Meanwhile, MIDF Research said it was maintaining its projection that IPI growth to be in negative for the whole year (2020: -5.4%; 2019: +2.3%), due to the sharp decline in production activities after the MCO.

From January to May, the IPI fell by an average –10.4% y-o-y.

“While we expect that there will be continued recovery in production in coming months, the level of activity will take time to revert back to the pre-pandemic level.”