Local manufacturing PMI posted its highest reading since July 2020 at 49.9 in March from 47.7 in February, pointing to stabilized operating conditions during the month as manufacturers prepare for better times ahead.

The evidence of an improving manufacturing sentiment came after firms reportedly increased their payrolls. However, firms continued to face supply chain disruption with both input and output prices skyrocketing to a four-year high.

Looking ahead, the spill-overs from an improving global demand amid tech upcycle, better business and consumer sentiments, and a gradual return to normalization are set to benefit the manufacturing sector in 2021. As such, we have raised our GDP projection to 5.5%–6.0% (BNM: 6.0%-7.5%).

• Local manufacturing PMI posted its highest reading since July 2020 at 49.9 in March from 47.7 in February, pointing to stabilized operating conditions during the month as manufacturers prepare for better times ahead. Nonetheless, the PMI remains under the contraction region for the eighth consecutive month.

• The evidence of improving manufacturing sentiment came after firms reportedly increased their payrolls which led to the employment sub-index jumping to the expansionary region for the first time since April 2019. Notably, the demand for labour was bolstered by the firms’ preparation for future orders that required higher capacity. As at January, the employment in manufacturing sector stood at 2.2 million or 2.4% y/y.

• The improvement in the health of the sector was supported by a decent pick-up in new orders and output levels, both of which expanded to a large magnitude since October 2020 and January 2021, respectively.

• Meanwhile, new export orders remained tepid as some firms reported returning orders in Asia and the Americas. We noticed that the subdued new export orders index coincides with softening manufacturing exports for two consecutive months at -3.8% m/m in February and -3.1% m/m in January 2021. However, we think the impact may only be temporary due to the global second-wave Covid-19 impact at the start of 2021.

• Nonetheless, firms continued to experience challenges in sourcing and delivering raw materials which resulted in shortages and delays following the restrictive measures that stretched the supply chain to some degree.

• As a result, the firms’ input and output prices skyrocketed to a four-year high, reflecting the increase in a broad variety of raw material prices and higher freight cost. They also sought to partially pass down the cost to their clients. This also coincides with February’s manufacturing factory gate price, which rose 1.5% y/y (Jan’20: 1.1%), the highest since November 2017.

• The positive growth recorded in manufacturing PMI prints is in line with our Asean peers. Similarly, Indonesia and Thailand unveiled their March manufacturing PMI which rose once again to 53.2 and 48.8, as compared to 50.9 and 47.2, respectively in February.

• Looking ahead, the spill-overs from an improving global demand amid tech upcycle, better business and consumer sentiment, and a gradual return to normalization are set to benefit the manufacturing sector in 2021. Also, the declining domestic Covid-19 cases followed by the government’s decision to ease SOP restrictions in the manufacturing sector should help reduce production constrains. As such, we have raised our GDP projection to 5.5%– 6.0% (BNM: 6.0%-7.5%).

Source: AmInvest Research - 2 Apr 2021