As expected, MCO 3.0 continued to weigh on the manufacturing PMI. In July, the reading was 40.1, below the 50 threshold, marking a contraction. Poor output and new orders continued to weigh on manufacturing performance. However, the downside was contained by exports orders which remained healthy.

With average manufacturing PMI at 48.4 in 2Q21, it suggests downside risk for 2Q GDP growth. Nevertheless, with exports averaging at 44.0% y/y and expectations for export-led manufacturing activities to support overall industrial production and the Pemulih stimulus measures, we should see 2Q GDP hovering around 11%–13%. We reiterate the full-year GDP at 4.0%–4.5%

A. Key Highlights

• MCO 3.0 impacted the economy severely. This is reflected in July’s PMI which came in at 40.1 from 39.9 in June. The threshold between expansion and contraction is 50, and our manufacturing PMI was below the critical mark for five months between January and July.

• The poor manufacturing PMI was due to the continuous drop in output and new orders dragged down by weak demand and confidence. But the downside was contained by the improved external demand from the US and Europe.

• Meanwhile, input prices increased for the 14th consecutive month due to high raw material prices and higher freight costs. Added by supply chain disruptions, these have worsened suppliers’ lead times to its steepest level since May.

• However, the risk of the company’s margin erosion remains manageable as firms were still able to partially pass the higher cost to clients.

• The employment level stabilized after three months of job shedding. However, businesses continued to cite difficulties in hiring foreign workers.

B. Key Takeaways

• The average PMI in 2Q21 at 48.4 compared to 48.8 in 1Q21 (2Q20 at 42.6) suggests downside risk to 2Q GDP growth.

• However, the downside is expected to be cushioned by exports which averaged at at 44.0% y/y compared to 18.0% y/y in 1Q21 (2Q20 at -14.9% y/y). It would also mean that industrial production, which averaged at 38.0% y/y for the first two months of 2Q21, may provide some comfort supported by export-led activities.

• Added with the latest Pemulih stimulus measures, amounting to RM150bil or 10% GDP, and a low base, the 2Q GDP should hover around 11%–13%. We reiterate our full-year growth at 4.0%–4.5%.

Source: AmInvest Research - 3 Aug 2021