OVERVIEW

The downturn in the global manufacturing PMI moderated at the start of 2023, though remaining below the 50pt expansion level at 49.1 in January (48.7 in December), as the rate of decline in global production and new orders continued to slow. Meanwhile, manufacturing activities in ASEAN countries showed a mixed performance, as many regions are still hovering above the 50pt expansion level. However, Malaysia’s manufacturing PMI continued to decline further to 46.5 in January from 47.8 in December 2022, falling below the 50pt expansion level since September 2022.

We are cautious on the near-term outlook given the risks remaining heavily skewed on the downside, amid elevated inflationary pressures and interest rate environments, as well as escalation of geopolitical conflicts. Therefore, 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 1H 2023. The International Monetary Fund’s (IMF) in its January WEO also guided that despite an improvement in supply constraints, world trade growth is forecast to fall to 2.4% in 2023 from 5.4% in 2022 before increasing to 3.4% in 2024.

UNSYNCHRONISED MANUFACTURING ACTIVITY GLOBALLY

Manufacturing activities displayed weakening growth in many Asian countries. In January. China’s Caixin General Manufacturing PMI, which tracks more small and private manufacturers in China than the official gauge, increased by 0.2 points to 49.2 but remained below the 50 expansionary level for the sixth consecutive month, as the Covid-19 wave after China's reopening, weakening new export orders, and increasing recession risks pulled down the manufacturing supply and demand balance. Similarly, the demand for South Korean goods continued to remain in the contractionary level at the start of the year, albeit at a slower pace, which registered at 48.5, as compared to 48.2 in December last year, reflecting weakening demand conditions in both domestic and external markets. Taiwan’s manufacturing PMI, on the other hand, continued to shrink at 44.3 in January, as compared to 44.6 in December 2022, with businesses reporting that weak global economic circumstances and excessive inventory levels at some clients had hampered sales at the beginning of the year. On a positive note, inflationary pressures were kept in check thanks to a relative improvement in several supply chain components as input demand declined.

At the start of 2023, manufacturing activities in ASEAN countries started to pick up in terms of both production and orders, as the region grew increasingly hopeful that China's reopening would help counteract the rest of the world's grim economic picture. Asean manufacturing PMI registered a stronger growth at 51.0 in January (50.3 in December). S&P Global also guided that as long as supply-side pressures continue to subside and inflation rates remain below their post-pandemic norms, the business climate may continue to improve in the months to come. Thailand led the region with a January PMI reading of 54.5, from 52.5 in December, due to broad-based improvements in all five components (new orders, output, employment, stock of purchases as well as suppliers’ delivery times). The Philippines (53.5) and Indonesia (51.3) also registered readings above the 50-threshold level in January. It was also guided that the robust stance taken by the Philippines’ central bank has been effective as seen by signs of easing pressures last month while demand has not yet been adversely affected by the policy tightening. Overall, the downturn in the global manufacturing PMI moderated at the start of 2023, despite remaining below the 50pt expansion level at 49.1 in January (48.7 in December), as the rate of decline in global production and new orders slowed.

MALAYSIA’S JANUARY PMI MODERATED TO A GREATER DEGREE

Malaysia was the only country in the Asean region where conditions worsened, as the country’s manufacturing PMI continued to decline further to 46.5 in January from 47.8 in December 2022, falling below the 50pt expansion level since September 2022. The weaker monthly manufacturing PMI was due to the continued scaling back of production and new orders, as there were further signs that economic conditions remained muted. S&P Global also guided that the gradual slowdown in manufacturing production and GDP growth at the end of last year is expected to sustain into 2023. On a positive note, the latest survey continued to show improvement in supply chain pressures in January, as supplier delivery times shortened for the first time since November 2019, albeit only marginally. Input costs rose at the softest pace, as firms reported lower prices for a variety of inputs including oil. As evident, this was already translated to improving domestic producer price index, a measure of inflation at the producer/manufacturer level, where the pace of inflation has been declining, indicating possible relief on inflationary pressure from the pass-through producers to consumers, at 3.5% YoY in December. According to S&P, forward looking indicators showed manufacturers remained positive that output will sustain over the next 12 months amid hopes that both domestic and overseas demand conditions would improve as the global economy recovers.

OUTLOOK

Overall, we believe that in view of the global economic slowdown amid softer growth of Malaysia’s exports of manufactured goods of 4.6% YoY in December 2022 (15% in November 2022), underpinned by E&E exports (+4.7%), we believe the performance of the country’s manufacturing output will trend in tandem with the monthly global semiconductor sales, which has continued to signal further weakness, with a negative growth of 9.2% YoY in November 2022 (-4.6% in October). The International Monetary Fund’s (IMF) in its January WEO guided that despite an improvement in supply constraints, world trade growth is forecast to fall to 2.4% in 2023 from 5.4% in 2022 before increasing to 3.4% in 2024. The IMF also predicted that after reaching 3.4% in 2022, the global growth rate will drop to 2.9% in 2023 before rebounding to 3.1% in 2024. We are thus concerned about the near-term forecast since the risks are still significantly skewed to the negative even though they have started to lessen since 4Q22.

Future economic decline in developed nations, particularly in the US and EU this year, will be detrimental to intra-ASEAN trade. Nevertheless, we believe Malaysia's manufacturing sector will be supported by expected increased demand from China, mainly due to China’s full reopening in 2023, which would improve their higher-frequency data and resuscitate their slowing economy, in turn benefitting our domestic economy. However, we believe that pronounced positive spillovers may take much longer than expected. Therefore, we expect the direction of Malaysia’s manufacturing PMI to follow the global manufacturing PMI trend closely, which is likely to continue softening below the 50pt expansion level in 1H 2023.

Source: PublicInvest Research - 3 Feb 2023