OVERVIEW

ASEAN manufacturing PMI rose further to 51.5 in March from 50.4 in February, thereby signalling a third successive monthly improvement in operating conditions. Indonesia and the Philippines demonstrated resilience in their manufacturing sectors, maintaining positions above the critical 50-mark threshold in March. Indonesia led the pack with a PMI of 54.2, followed by the Philippines at 50.9. However, Thailand continued to grapple with challenges, remaining below the 50-mark with a PMI of 49.1 in March, despite registering higher than 45.3 in February. Meanwhile, Malaysia remained below the 50- threshold level at 48.4 in March (49.5 in February), underscoring further moderation in the Malaysian manufacturing sector as demand conditions remained muted.

Despite the persistent influence of factors indicative of enduring fragility in external demand, we believe that Malaysia's Purchasing Managers' Index (PMI) is poised to align with global trends, potentially surpassing the critical expansion threshold of 50 points in the near term.

UNSYNCHRONISED MANUFACTURING PERFORMANCE GLOBALLY

In March, the Caixin China General Manufacturing PMI saw a modest increase of 0.2 points from February, reaching 51.1, marking its highest level since February 2023. The index sustained its expansionary trajectory for the fifth consecutive month, signalling ongoing enhancements within the sector. This upturn was underpinned by heightened inflows of new orders, both domestic and international, prompting Chinese manufacturers to ramp up production and elevate purchasing activities amid improved sentiment. However, a cautious approach prevailed regarding staffing levels. Notably, input costs declined for the first time in eight months, affording Chinese manufacturers the opportunity to further reduce selling prices, aiming to stimulate sales and maintain competitiveness in the market.

The economic performance during the initial two months of the current year surpassed expectations, coinciding with the Caixin manufacturing PMI sustaining expansionary levels for five consecutive months. This continuity suggests a generally steady and favourable trajectory for economic recovery. However, the economy confronts persistent challenges amid prevailing uncertainties and unfavourable conditions. Lingering downward pressures persist, evidenced by subdued employment figures, low prices, and unresolved deficiencies in effective demand. This underscores the imperative to bolster both domestic and external demand further. While a series of policies implemented earlier in the year aimed at stabilizing growth are gradually manifesting their impact, addressing the prevailing economic hurdles and striving to achieve ambitious growth targets necessitate sustained efforts to expedite growth while concurrently enhancing the quality and efficiency of economic development.

In March, the S&P Global Taiwan manufacturing PMI registered at 49.3, showing a slight improvement from 48.6 in February and indicating only a marginal deterioration in operating conditions. Despite signaling a contraction in the sector for the 22nd consecutive month, this decline was the least severe since June 2022. Both output and new orders experienced slower rates of decline, alongside reduced purchasing activity. Furthermore, the pace of destocking slowed, offering a glimmer of hope for a potential upward turn in the inventory cycle. Meanwhile, Japan's manufacturing PMI increased from 47.2 in February to 48.2 in March, signaling a deterioration in the health of the Japanese manufacturing sector. Inflationary pressures persisted during the survey period, although the rate of input price inflation eased to its weakest level in just over three years, broadly aligning with the long-run average. Conversely, selling price inflation accelerated to a three-month high, reflecting firms' efforts to safeguard profit margins by passing on higher expenses to customers. Additionally, recent data indicated endeavours to diminish stock levels, with both pre- and post-production inventories declining for the third consecutive month. Notably, disruptions in the Red Sea and Panama Canal were cited as contributing factors to the continued elongation of delivery times, underscoring the challenges posed by global supply chain disruptions.

In March, the ASEAN manufacturing PMI surged to an 11-month high of 51.5, up from 50.4 in February, indicating a robust improvement in operational conditions, marking the most significant upturn in nearly a year. Notably, demand for ASEAN manufactured goods rebounded strongly, with new orders experiencing growth for the first time in seven months, reaching the fastest expansion rate since mid-2023. However, this resurgence predominantly stemmed from domestic demand rather than international markets, as the downturn in new export orders persisted, marking a 22-month consecutive decrease. Despite this, the renewed increase in new orders stimulated growth in output, marking its strongest performance in ten months. Additionally, backlogs saw a marginal rise in March, marking the first increase since last June, albeit only slightly. Driven by heightened production demands, firms increased their staffing levels for the second consecutive month, albeit at a slower and marginal rate. Concurrently, buying activity saw an uptick, with the latest increase marking the strongest recorded in the ongoing five-month expansion sequence. Despite improved demand conditions, average vendor performance in terms of input delivery times remained largely unchanged. Looking towards the future, sentiment across the region leaned largely towards optimism; however, the level of confidence remained historically subdued, slipping to an eight-month low.

MALAYSIA’S PMI SUSTAINED BELOW THE 50-MARK IN MARCH

In March, Malaysian manufacturers faced continued pressures as indicated by the latest PMI data, which revealed a slight deepening of the sector's moderation, contrasting with initial positive indications at the onset of 2024. Declines were particularly notable in new orders, output, and employment, alongside a dip in business confidence to a seven-month low. Concurrently, there was a resurgence in vendor performance, attributed to suppliers' capacity to meet orders amidst subdued demand. Despite a heightened rate of input cost inflation by the end of the first quarter, marking the highest level thus far in 2024, this escalation did not translate into higher charges, as output prices remained unchanged. The seasonally adjusted manufacturing PMI in Malaysia experienced a decline from 49.5 in February to 48.4 in March. Drawing from the historical correlation between the PMI and official GDP data, it suggests that the 1Q24 is likely to witness sustained growth, aligning with a modest improvement in annual manufacturing production. S&P Global's guidance echoes this sentiment, indicating that despite prevailing concerns regarding the duration of demand weakness, firms retain optimism for eventual improvement over the upcoming year. Nevertheless, these apprehensions contributed to a dip in business optimism, reaching a seven-month low.

OUTLOOK

In the near term, Malaysia's Purchasing Managers' Index (PMI) is likely to mirror global trends, suggesting a level above the critical expansion threshold of 50 points. Anticipating a positive trajectory, the 2024 global semiconductor market forecasts a robust recovery, poised for double-digit growth at 13.1%, outstripping earlier projections of 11.8%. This augurs a pivotal juncture for Malaysia's manufacturing sector and the semiconductor industry worldwide. The anticipated upswing is particularly promising for major E&E exporters like Malaysia, given that exports of E&E products constitute over 40% of the nation's total gross exports. Furthermore, the Ministry of Finance anticipates a substantial 5.5% increase in manufactured goods exports for 2024, further underpinning the optimistic sentiment.

However, Malaysia's vulnerability to global economic fluctuations, particularly in electronics and semiconductor sectors, is underscored by anticipated modest global economic growth in 2024. Heavy reliance on key trade partners like the US, China, and the EU heightens concerns for ASEAN trade. Additionally, the major elections in significant trading partners this year, including the US, South Korea, and India, introduce further complexity, potentially shaping international trade dynamics. The escalation of the Red Sea Crisis poses a significant threat, potentially disrupting global supply chains and elevating business costs. Despite these risks, an anticipated uptick in electronics exports and favourable base effects could partially offset negative impacts. As such, we forecast Malaysia's exports of goods and services to rebound with a growth rate of +5.4% in 2024. Moreover, the IMF anticipates a 3.1% expansion in global GDP, driven by improved growth prospects in the world's largest economies, the US and China, both of which are Malaysia’s foremost trading partners. This enhanced global economic outlook is expected to be bolstered by heightened private and public expenditures, increased labour force engagement, enhanced supply chain dynamics, and more favourable energy and commodity prices. MITI and its agency, MATRADE, maintain a cautious yet optimistic stance, remaining vigilant regarding global risks while actively seeking export opportunities in both existing and new markets, in alignment with the National Trade Blueprint.

Source: PublicInvest Research - 2 Apr 2024