OVERVIEW

ASEAN manufacturing Purchasing Managers' Index (PMI) posted a reading above the neutral 50.0 mark for the fourth successive month in April. At 51.0 in April, down from 51.5 in March, the latest reading highlighted a softer improvement in the health of the ASEAN manufacturing domain. Indonesia and the Philippines demonstrated resilience in their manufacturing sectors, maintaining positions above the critical 50-mark threshold in April. Indonesia led the pack with a PMI of 52.9, followed by the Philippines at 52.2. However, Thailand continued to grapple with challenges, remaining below the 50-point mark with a PMI of 48.6 in April. Meanwhile, Malaysia remained below the 50- point threshold level at 49.0 in April (48.4 in March), signalling further downbeat trends across the Malaysian manufacturing sector at the start of 2Q24.

Despite the sustained impact of factors signalling continued fragility in external demand, we believe that Malaysia's PMI is positioned to converge with global trends, potentially surpassing the 50-level mark. However, we anticipate that this may take a longer time than we initially projected.

UNSYNCHRONISED MANUFACTURING PERFORMANCE GLOBALLY

In April, the Caixin China General Manufacturing PMI rose modestly by 0.3 points from March to reach 51.4, marking its highest level since February 2023. This signifies the sector's sixth consecutive month of growth amid an overall improving market. Both supply and demand expanded at an accelerated pace during this period. Manufacturers witnessed growth in output and total new orders, with respective sub-indexes reaching new highs since May 2023 and February 2023. Notably, external demand surged, with the gauge for new export orders reaching its highest level since November 2020. Investment goods outperformed both consumer and intermediate goods in terms of both supply and demand, domestically and internationally.

China's economic performance exceeded market expectations in 1Q24, characterised by steady manufacturing growth and a gradual consumption recovery. This robust start aligns with the sustained expansionary trend observed in the Caixin Manufacturing PMI over the past six months. However, weak expectations persist as a significant obstacle to economic development, amplifying pressure on employment and elevating the risk of deflation. To mitigate these challenges, it is imperative to ensure the effective and timely implementation of existing policies, thereby sustaining the current economic recovery momentum and ultimately enhancing overall market expectations.

In addition, in view of the ongoing support from factors like soft Chinese Yuan and export price deflation, coupled with export’s low base effect from last year's decline and observed export growth in the initial two months of 2024, we expect a positive trajectory for China’s export growth for 2024. However, given the weakening investment in infrastructure and subdued conditions in the property sector, we remain cautious of the outlook.

In April, Taiwan's manufacturing sector experienced marginal growth, marking the first instance of expansion in two years. The manufacturing PMI recorded a reading of 50.2, signalling an improvement from March's 49.3 and indicating a slight enhancement in operating conditions—the first observed in the survey's data over this period. While reports indicated a rise in market demand, particularly from domestic sources, new export orders declined. This divergence underscores the nascent nature of the recovery, with overall customer demand remaining subdued, constraining firms' ability to transfer higher costs to clients. Understandably, firms exhibited caution in their procurement activities, opting to utilize existing inventories. Meanwhile, in April, Japan's manufacturing PMI rose from 48.2 in March to 49.6, indicating a trajectory toward stabilization within Japan's manufacturing economy. Confidence in prospects remained steady compared to March, maintaining a relatively high level within the context of the survey's historical data. Firms expressed optimism regarding a potential upturn in the global inventory cycle and anticipated a general enhancement in demand over the forthcoming 12 months. These forward-looking expectations partially accounted for a second consecutive monthly increase in employment levels.

In April, the ASEAN manufacturing PMI maintained its position above the neutral 50.0 mark for the fourth consecutive month, standing at 51.0, slightly lower than the 51.5 recorded in March. This latest reading denotes a moderated improvement in the ASEAN manufacturing sector's health. According to April PMI data by S&P Global, operating conditions within the ASEAN manufacturing sector improved, supported by expansions in new orders and output, although the growth rate of the latter slightly cooled. Purchasing activity also increased, facilitating the accumulation of pre-production holdings for firms, albeit at a softened rate of increase in both areas. However, employment experienced a setback, with job shedding recorded for the first time in six months, marking the fastest rate of decline in 29 months. Specific to individual countries, manufacturing conditions improved in four out of seven ASEAN constituents, with Indonesia leading the rankings. Conversely, Thailand signalled the most pronounced deterioration in operating conditions for the second time in the past three survey periods. ASEAN manufacturers expressed expectations for output growth in the upcoming 12 months. Nevertheless, the level of confidence mirrored its joint-weakest point since July 2020, on par with the sentiment observed in July 2023.

MALAYSIA’S PMI SUSTAINED BELOW THE 50-POINT MARK IN APRIL

In April, the most recent data revealed ongoing pessimistic trends within the Malaysian manufacturing domain at the commencement of 2Q24. Despite prevailing subdued demand, there were faint indications of an upward trajectory among firms, as they curtailed production at a gentler pace amidst a deceleration in the reduction of new order inflows. Furthermore, employment levels stabilised in April, marking the cessation of a three-month period characterized by job shedding. Concerning prices, input cost inflation exhibited little change during the month, consequently contributing to a renewed uptick in output prices, albeit at a marginal rate of charge inflation. The seasonally adjusted manufacturing PMI in Malaysia ascended to 49.0 in April, an improvement from 48.4 in March, indicating a moderated downturn in the Malaysian manufacturing sector. The most recent PMI data indicate that GDP growth is currently progressing at a slightly enhanced pace compared to the conclusion of 2023, alongside indicating modest YoY enhancements in official manufacturing production figures. S&P Global, in its recent report, highlighted that the sentiment towards output over the forthcoming year remained optimistic in April, albeit with an overall confidence level dipping to its lowest point in eight months. Firms frequently cited uncertainty concerning the timing and pace of any demand resurgence, with downside risks primarily revolving around a subdued global economic environment.

OUTLOOK

Despite a marginal MoM decline, global semiconductor sales in February continued to outpace those of the same month last year, underscoring the sustained momentum in YoY growth that has characterised the market since mid-2023. Anticipating a positive trajectory, the 2024 global semiconductor market forecasts a robust recovery, poised for double-digit growth at 13.1%, outstripping earlier projections of 11.8%. This augurs a pivotal juncture for Malaysia's manufacturing sector and the semiconductor industry worldwide. The anticipated upswing is particularly promising for major E&E exporters like Malaysia, given that exports of E&E products constitute over 40% of the nation's total gross exports. Furthermore, the Ministry of Finance anticipates a substantial 5.5% increase in manufactured goods exports for 2024, further underpinning the optimistic sentiment.

However, Malaysia's vulnerability to global economic fluctuations, particularly in electronics and semiconductor sectors, is underscored by anticipated modest global economic growth in 2024. Heavy reliance on key trade partners like the US, China, and the EU heightens concerns for ASEAN trade. Additionally, the major elections in significant trading partners this year, including the US, South Korea, and India, introduce further complexity, potentially shaping international trade dynamics. The escalation of the Red Sea Crisis poses a significant threat, potentially disrupting global supply chains and elevating business costs. During the initial two months of 2024, Suez Canal trade experienced a 50% decrease compared to the preceding year, concurrently, trade via the Panama Canal witnessed a 32% decline, precipitating disruptions in supply chains and introducing distortions into pivotal macroeconomic metrics.

Despite these risks, an anticipated uptick in electronics exports and favourable base effects could partially offset negative impacts. As such, we forecast Malaysia's exports of goods and services to rebound with a growth rate of +5.4% in 2024. Furthermore, the IMF forecasts a 3.2% increase in global GDP for the year 2023. This projection for 2024 has been adjusted upward by 0.1 percentage points compared to the January 2024 WEO Update, and by 0.3 percentage points relative to the October 2023 WEO forecast. However, despite these revisions, the outlook for global growth in 2024 remains below the historical annual average of 3.8% for the period spanning 2000 to 2019. This subdued growth trajectory is attributed to the implementation of restrictive monetary policies and the scaling back of fiscal support, alongside sluggish underlying productivity growth. As articulated in the recent trade performance note, given Malaysia's status as a highly open economy with a merchandise trade to GDP ratio of 144.7% in 2023, it is susceptible to influences from global developments.

The World Trade Organization (WTO) projects that the volume of global merchandise trade will expand by 2.6% in 2024, followed by a further increase of 3.3% in 2025, driven by a resurgence in demand for traded goods after a contraction experienced in 2023. Despite the outbreak of conflict in Ukraine, trade volume witnessed a decline of 1.2% last year after registering a robust expansion of 3.0% in 2022. The current forecast, however, is encumbered by a notable degree of uncertainty stemming from various risk factors prevalent in the global economy, including regional conflicts, geopolitical tensions, and escalating protectionist measures. Should the current projections materialise, trade volume growth in 2024 could reach as high as 5.8% or plummet to as low as -1.6%. Conversely, the anticipated moderation in inflation for 2024 is poised to catalyse a rebound in the consumption of manufactured goods, thereby bolstering merchandise trade volume growth over both 2024 and 2025. Should recent inflationary declines persist, policymakers are expected to initiate interest rate cuts, consequently stimulating investment expenditure, particularly in capital goods trade, albeit with a lag effect. As cost pressures alleviate and business sentiment improves within the EU, consumption and investment activities are anticipated to stabilise in 2024 and strengthen further in 2025.

Source: PublicInvest Research - 3 May 2024