Gloomy Domestic Industrial OutlookOVERVIEWThe recent dip in ASEAN's manufacturing Purchasing Managers' Index (PMI), falling below the 50-point threshold, signals a concerning development for the region's industrial landscape. Notably, Thailand (47.8) and Vietnam (49.7) have seen their PMIs drop below the pivotal level, though Indonesia is maintaining its robust performance. Malaysia, with a PMI of 46.8 in September, faces challenges that amplify its vulnerability to downside risks. This confluence of factors portends a trajectory for Malaysia's PMI that mirrors the global manufacturing PMI, with expectations of remaining below the 50-point threshold for the remainder of the year.

UNSYNCHRONISED MANUFACTURING PERFORMANCE GLOBALLY

China's manufacturing landscape exhibited a gradual but notable resurgence in September, marking its second consecutive month of improvement, hinting at nascent economic stabilisation. The Caixin Manufacturing PMI sustained its position above the pivotal 50-point threshold, registering 50.6, a slight dip from the previous month's 51.0. Noteworthy was the robust production growth, reaching a four-month high, accompanied by a modest uptick in new business. While the decline in new export orders moderated, foreign sales only saw a marginal dip. However, the outlook for the future remains cautious, with Caixin China's report highlighting subdued year-ahead confidence, a factor contributing to a dip in employment levels within Chinese manufacturing facilities. Additionally, the official survey released over the weekend confirmed China's manufacturing sector's return to expansion after a six-month hiatus, reinforcing the narrative of a measured but discernible recovery.

Amid efforts to stimulate growth through looser monetary policies and increased local government infrastructure investments, a cautious approach remains imperative when evaluating China's economic trajectory. While there are glimpses of stabilisation, an air of caution prevails. Sluggish exports, a persistent downturn in the property sector, particularly in lower-tier cities, and subdued private sector confidence collectively underscore the potential for sustained economic challenges or further deterioration in the coming months. In this context, it is likely that the manufacturing PMI will continue to exhibit a subdued posture. Furthermore, recent signs of stabilisation may inadvertently hinder Beijing's capacity to implement the necessary measures for comprehensive economic recovery, with particular challenges evident in the property sector.

In September, Taiwan's manufacturing sector continued to grapple with challenges, as its PMI held firm below the critical 50-point threshold, registering at 46.4, an improvement from August's 44.3. While this marks a tentative step toward easing the manufacturing downturn, it is crucial to monitor whether this trend persists and if key indices move closer to the neutral 50.0 level, signalling potential stabilisation. A parallel narrative unfolds in Japan, where the manufacturing PMI dipped to 48.5 in September, the most significant deterioration since February. The data underscored weakness across core components, with notable declines in output and new orders, while employment, purchase stocks, and supplier delivery times remained largely neutral. The concerning weakness in new orders, leading to a substantial reduction in outstanding work, reflects ongoing manufacturing sector challenges, attributable in part to sluggish domestic and global economic trends.

The ASEAN manufacturing sector, which had shown consistent improvement since October 2021, faced a setback in September, slipping into contraction territory with a PMI of 49.6, down from August's 51.0. Companies reported a decline in new orders, and production saw its weakest expansion in two years. Inflationary pressures showed a slight uptick, with input prices and output charges rising at the fastest rates in five and four months, respectively. Indonesia remained resilient with a PMI reading of 52.3 in September, indicating continued growth momentum and bolstered business confidence. In contrast, Thailand's PMI dropped to 47.8 in September, reflecting a slowdown in its manufacturing sector. On a positive note, the Philippines experienced a resurgence in its manufacturing sector, as new orders drove a notable uptick, resulting in a PMI of 50.6 in September, up from August's 49.7. These developments underscore the varied dynamics within the ASEAN manufacturing landscape.

MALAYSIA’S PMI FELL FURTHER BELOW THE 50-MARK IN SEPTEMBER

As 3Q23 drew to a close, Malaysia's manufacturing sector continued to grapple with contractionary conditions, presenting persistent challenges for businesses. Economic constraints curtailed both production and demand, with manufacturers consistently reporting weakened demand during this period, as reflected in various indicators within the latest PMI data. Notably, both output and new orders experienced more significant moderation than in the preceding month, while new export orders registered the third sharpest decline in series history. The country's PMI retreated further to 46.8 in September from the preceding month's 47.8. S&P Global's analysis indicates that 3Q23 PMI figures imply a further deceleration in YoY GDP growth compared to 2Q23. Furthermore, this data aligns with the notion of official manufacturing production maintaining relative stability on an annual basis.

OUTLOOK

Against the backdrop of a challenging global economic landscape, Malaysia's manufacturing sector appears poised to navigate the prevailing headwinds, albeit with cautious optimism. Notably, it is anticipated that this sector will echo the current cyclical downturn observed in the semiconductor industry, a domain marked by sustained challenges to growth. Our forecasts point to a modest 2% growth deceleration in Malaysia's manufacturing output for the current year, following an 8.1% expansion in 2022. We believe that it is likely that Malaysia's PMI will mirror global trends for the remainder of the year, with the former expected to consistently register below the critical expansion threshold of 50 points. Therefore, this period calls for astute policy responses and strategic manoeuvres to ensure the manufacturing sector's long-term resilience and competitiveness on the global stage.

Looking ahead, the Malaysian government's strategic vision underscores a pivotal transformation towards smart manufacturing, underpinned by the adoption of 4IR technologies, the cultivation of a highly skilled workforce, a focus on high value-added activities, and a commitment to environmental, social, and governance (ESG) principles. The New Industrial Master Plan 2030 (NIMP 2030) is set to chart the course for this transformation.