OVERVIEW

The Global Manufacturing Purchasing Managers’ Index (PMI) slipped below the 50pt threshold for the third consecutive month, indicating deterioration in the production trend in the coming months amid a worsening downturn in global trade flows, muted demand related to the ongoing cost of living crisis and growing economic prospect uncertainties, despite signs of easing in supply chain delays as a result of cooling demand. Meanwhile, ASEAN manufacturing PMI remained above the 50pt threshold, despite losing its growth momentum for the second month. We believe the declining trend will continue in the coming months, which will inevitably drop below the neutral threshold. However, Malaysia’s manufacturing PMI continued to drop below the neutral level of 50 for the third month to 47.9 in November, from 48.7 in October.

We are cautious on the near-term outlook given the risks remaining heavily skewed on the downside, amid increasing risks of possible global recession (particularly in the advanced economies), rising inflationary pressures and interest rate environments, as well as escalation of geopolitical conflicts and China’s economic slowdown amid a record Covid-19 outbreak. However, we expect that the direction of Malaysia’s manufacturing PMI will follow the global manufacturing PMI trend closely, which is likely to continue softening below the 50pt expansion level in 1H23.

MIXED PERFORMANCE IN FACTORY ACTIVITY GLOBALLY

Manufacturing activities displayed an uneven expansion path across Asian countries. In November, China’s Caixin General Manufacturing PMI rose 0.2 points to 49.4, from the previous month of 49.2, signaling still-weak health of the manufacturing sector, amid tightening in containment measures as a result of Covid-19 outbreak and worsening supply chain delays in China. Similarly, the demand for Japanese goods worsened midway through the final quarter of 2022 due to high inflation and weakening economic conditions, followed by strong drops in output and new orders, dropping below the 50-level mark for the first time since January 2021 at 49.0 in November (50.7 in October). Although not as downbeat as seen in October (41.5), Taiwan’s manufacturing PMI remained below the 50-level mark for six months at 41.6 in November, since the pandemic-era low in May 2020 as production, new orders and export sales also declined.

However, manufacturing activities in ASEAN countries showed a mild improvement, with the region’s PMI maintaining above the 50pt threshold at 50.7 in November from 51.6 in October. The modest expansion indicated the softest upturn in output in eight months, along with its first contraction in factory orders since September 2021. Thailand sustained its 50pt expansion level at 51.1 in November, albeit slower than 51.6 in October, despite reflecting weakening confidence amid rising deterioration in economic conditions. In tandem with that, Indonesia’s PMI also showed a softening growth at 50.3 in November, from 51.8 in October, due to slower growth in both production and sales. However, Philippines’ PMI increased slightly to 52.7 in November (52.6 in October), attributable to production levels and factory orders. Overall, global PMI dropped further to a 29-month low of 48.8 in November (49.4 in October), indicating that global industrial production is showing further signs of slowing down, especially in advanced economies.

MALAYSIA’S NOVEMBER PMI CONTINUED TO ERODE

Malaysia’s manufacturing PMI continued to decline to 47.9 in November (48.7 in October), falling below the 50pt expansion level since September 2022. The weaker monthly manufacturing PMI was partly due to lower levels of production and the fastest scaling back in new orders since August 2021, as rising prices and raw material shortages hampered client confidence. Some producers continued to report improvement in supply chain delays in November, although there was tentative evidence that constraints were progressively reducing, as supplier delivery times lengthened, albeit being the softest in three years. Input costs rose as well as factory costs and firms were passing their costs to customers. As evident, this was already translated to high domestic producer price index (PPI), a measure of inflation at the producer/manufacturer level, where the pace of inflation remained slightly above the consumer level inflation, at 4.9% YoY in September (6.8% in August).

According to S&P, firms remained optimistic on the outlook for seventeen consecutive months amid hopes that demand conditions would improve next year. This was tempered however by concerns over price rises, weakening export demand and material shortages which could hinder production which pushed the level of expectation to a five-month low.

Source: PublicInvest Research - 2 Dec 2022