In July, the health of Malaysia’s manufacturing sector continued to deteriorate as reflected in the Nikkei Manufacturing Purchasing Managers Index (PMI). It slipped further into the contraction region at 47.6 in July from 47.8 in June. Manufacturing players continued to report tougher business environment due to lacklustre demand conditions which had put a strain on production, and discourage firms from hiring.

The latest Malaysia’s PMI data suggests that 3Q2019 GDP growth may soften as compared with 2Q2019. However, based on the historical PMI reading, it suggests that the PMI’s current level may keep GDP growth at 4.5%, which is in line with our forecast. Nevertheless, our concern at this is juncture is that we are still not seeing signs of global manufacturing sector bottoming out. As such, the risk to the economy is still tilted to the downside. Based on our assessment, our worst-case scenario suggests that GDP growth can hit as low as 4.0% should the headwinds intensify.

• In July, the health of Malaysia’s manufacturing sector continued to deteriorate as reflected in the Nikkei Manufacturing Purchasing Managers Index (PMI). It slipped further into the contraction region at 47.6 in July from 47.8 in June. The demarcation between expansion and contraction is 50.

• Manufacturing players continued to report tougher business environment due to lacklustre demand conditions which had put a strain on production, and discourage firms from hiring. Although, our domestic players reported a net inflow of new businesses from abroad, in particular from the US, Japan, and Turkey, the overall demand condition remains challenging on the back of stiff competition.

• As a result, the survey suggests that the local firms are having difficulties securing more new work, citing concerns over slowing global economic growth and geopolitical tensions as their key headwinds. However, manufacturers indicated that their business optimism remained strong in July, albeit a slight pullback from the peak in June, supported by new projects, expansion plans, and more aggressive marketing.

• Nevertheless, the softening trend of the PMI data falls in tandem with Asean’s Nikkei PMI which contracted further to 49.5 in July compared with 49.7 in June, the lowest since July 2017. The deterioration in the operating conditions was primarily fuelled by a slight decline in overall output with a slower pace seen in Thailand (50.3 in July from 50.6 in June) and Indonesia (49.6 in July from 50.6 in June).

• In contrast, operating conditions improved in Vietnam (52.6 in July and 52.5 in June) and the Philippines (52.1 in July from 51.3 in June). Although Vietnam firms face softer external demand in tandem with its regional peers, it appears that the strong manufacturing output is supported by domestic demand.

• The latest Malaysia’s PMI data suggests that 3Q2019 GDP growth may soften as compared with 2Q2019. However, based on the historical PMI reading, it suggests that the PMI’s current level may keep GDP growth at 4.5%, which is in line with our forecast.

• Nevertheless, our concern at this is juncture is that we are still not seeing signs of global manufacturing sector bottoming out. As such, the risk to the economy is still tilted to the downside. Based on our assessment, our worst-case scenario suggests that GDP growth can hit as low as 4.0% should the headwinds intensify.

Source: AmInvest Research - 2 Aug 2019