Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Wed, 27 May 2020, 9:01 AM


Malaysia – Manufacturing PMI - Malaysia’s Manufacturing PMI Fell to 48.4 in March

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Output Weighed Down by Fall in Demand and Supply Amid Outbreak

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to 48.4 in March from 48.5 in February, trending lower for the third consecutive month, its lowest reading since September 2019. According to IHS Markit, the continued decline in manufacturing PMI (i.e. below the 50 level mark) was due the fall in output, which dropped to its lowest level since June 2016, while new orders had also registered it sharpest decline since the survey began in July 2012. Similar to other countries in the region, the Covid-19 outbreak had caused a drop in demand and restricted operating capacities amid delayed deliveries of inputs domestically. In addition, export demand also suffered in March led by a broad-based decline in foreign sales weighed down by the outbreak. Sentiment among manufacturers also took a hit, declining to its lowest level since January 2016, where over the next 12 months producers are now anticipating further reduction in production amid concerns over the outbreak having a long-lasting negative impact and expectations of sustained supply chain disruption.

The Asean manufacturing PMI fell to a record low of 43.4 in March from 50.2 in February dragged by declines in output, new orders, inventories and employment. All the Asean-5 countries registered PMI readings below the 50-level with Singapore’s PMI being the lowest at a near eight-year low of 27.7. While China’s Caixin manufacturing PMI recovered from its record low of 40.3 in February to 50.1 in March (as firms reopened after closures and travel restrictions in February), we believe this is temporary. IHS Markit also cautioned that demand conditions and supply chains in China will still be impacted by the outbreak amid delayed or cancelled orders and longer delivery times. It added that global manufacturing PMI was at 47.6 in March (47.1 in February), but weakness in manufacturing production deepens outside of China.

Moving forward, besides the disruption across the global manufacturing sector, we believe that the downside risk to Malaysia’s manufacturing PMI may likely continue, amid the ongoing Movement Control Order (MCO), which began on 18 March and will likely end on 14 April, as certain producers which are classified under non-essential and some essential services will remained closed, and will continue to dampen new orders and output. Externally, we believe uncertainty in resumption of production will also be a drag to Malaysia’s manufacturing sector, where China is a main export market for Malaysia. The overall weaker demand from other countries and sustained global supply chain disruption amid the slowdown in economic activity in view of ongoing lockdowns and quarantines will also weigh on export sales.

We project Malaysia’s real GDP growth to be in the negative territory possibly in the first and second quarter of 2020 on the back of sharp contraction in domestic demand and weak exports due to the extent of the Covid-19 outbreak globally and domestically. Households are likely to be cautious on their spending due to the uncertain economic activity and employment situation as well as possible shocks to household income. For the full year 2020, in view of weak domestic demand and global supply chain disruption on Malaysia’s manufacturing and external sector, we have cut our real GDP growth projection down to -3.5% for 2020. Weak global growth will likely drag on overseas demand for Malaysia’s manufactured goods, with growth in the manufacturing sector contracting by 5% projected for 2020 (3.8% in 2019).

Source: Affin Hwang Research - 2 Apr 2020

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