Macro: Price and growth could soften in 2H
- While June CPI was at a record high of 6.7% yoy, we expect inflation to peak in the near term due to weaker demand and a drop in commodity prices.
- June industrial production moderated by 2.2% yoy, partly due to temporary factors; however, we still see a challenging 2H22 ahead.
- We maintain our 2022F GDP growth estimate at 3.8% yoy with softer growth of 2.0% in 2023F.
Strong price pressures may not last
Headline CPI inflation for June rose to 6.7% yoy vs. 5.6% in May, the steepest increase since Sep 2008. Core inflation also shot up 4.4% yoy from 3.6% in the month prior. Food remains the biggest contributor to price performance. Notably, the price of chilled poultry rose 31.3% yoy (May: 19.9%) amid Malaysia’s ban on chicken exports from 1 Jun to stem its own domestic supply shortages. Similarly, other significant increases include eggs (24.9% yoy; May: 26.7%), petrol (35.8%; May: 30.1%), and point-to-point transport (20.4%; May: 13.7%).
Despite the strong June price pressures, we project inflation to peak in the near term due to several factors. Firstly, according to the Malaysian government, prices and supply of chicken in Malaysia have stabilised, which should allow the country to resume exports soon, and as a result, domestic price pressure should ease. Second ly, commodity prices have peaked, which should translate to lower cost of inputs for producers. Thirdly, with the rise in mortgage rates following the hawkish US Fed, we could see some weakening of demand-pull pressures. Finally, the Monetary Authority of Singapore has been quite active in managing imported inflation. On 14 Jul, it re-centred its S$NEER to the prevailing level to try to provide greater policy space. Overall, we maintain our 2022F average inflation projection of 5.1% yoy, compared to MAS’s revised estimate of 5.0-6.0%.
More challenging 2H22 growth outlook ahead
June industrial production grew at a dismal rate of 2.2% yoy vs. May’s 10.4% and below consensus estimate of 5.4%. The lower growth came from the contraction in both biomedical and chemicals clusters at -9.2% yoy (May: -5.1%) and -11.0% (May: -3.3%), respectively. The biomedical cluster was dragged by the pharmaceutical subcluster due to a change in the mix of active pharmaceutical ingredients produced. In the chemical cluster, the decline was caused by plant maintenance shutdowns in the petrochemicals subcluster as well as lower output of fragrances in the ‘other chemicals’ segment. The electrical & electronics (E&E) cluster also tapered off, growing by 2% yoy (May: 10.4%), due to a contraction in the semiconductor subcluster following weaker orders from China. On the positive side, transport engineering grew robustly at 32.0% yoy (May: 13.4%) owing to the marine & offshore as well as aerospace engineering subclusters. From our perspective, June industrial production was modest, though the performance can be partly attributed to temporary factors including the volatile biomedical industry. That said, a rebound in demand on the back of economic reopening in China has not materialised yet, especially as E&E recorded low growth. Thus far, PMI data generally point towards expansion with Singapore’s Electronics PMI for June rising to 50.8 from 50.5 previously.
Overall, with the release of June IPI data, 2Q22 industrial production was at 5.8% yoy vs. 6.0% in 1Q22. As such, the advance 2Q22 GDP estimate of 4.8% yoy could face slight downward revision, in our view. Going forward, a combination of a tightening stance in the global economy, high inflationary pressures and dissipation of pent-up demand will likely weigh on 2H22 production and GDP performance. Thus, we maintain our 2022F GDP growth estimate at 3.8% yoy with softer growth of 2% in 2023F.