OVERVIEW

The ASEAN manufacturing PMI remained stable at 51.7 in June, surpassing the neutral 50.0 mark for the sixth consecutive month. Malaysia's PMI slightly declined to 49.9 from 50.2 in May, indicating marginal contraction. In contrast, Thailand’s PMI reached a 12-month high at 51.7, up from 50.3, driven by improvements in four of the five sub-indices, excluding suppliers' delivery times, which remained neutral. The Philippines saw a slight decrease in its PMI to 51.3 from 51.9, while Indonesia's PMI dropped to 50.7 from 52.1. Vietnam's PMI surged to 54.7 from 50.3, propelled by a significant rise in new orders, reversing the modest growth trend of recent months.

Malaysia's manufacturing sector is poised for positive growth in 2024, buoyed by strong global semiconductor market projections. With E&E exports comprising over 40% of Malaysia's total exports, the sector stands to benefit significantly. Despite geopolitical tensions and economic uncertainties among key trading partners, Malaysia’s exports are projected to rise by 5.4% YoY in 2024. Enhanced economic governance and an improved competitiveness ranking support this outlook. Malaysia’s PMI is expected to align with global trends, consistently surpassing the 50-level mark in 2H24, contingent on the stabilisation of global uncertainties.

SURPASSED THE 50-EXPANSANIONARY LEVEL GLOBALLY IN JUNE

The Caixin China General Manufacturing PMI increased to 51.8 in June from 51.7 in May, marking the eighth consecutive month of sectoral health improvements and the most rapid expansion since May 2021. Supply and demand dynamics have maintained a positive trajectory. Manufacturing output has shown an uninterrupted expansion for the past five months, with the production subindex reaching its highest point in two years. The demand side has mirrored this growth, with the new orders subindex remaining in expansionary territory for the 11th month in a row. Notably, the demand for consumer and intermediate goods outpaced that of investment goods. Although exports have continued to rise, the growth rate has decelerated, marking the slowest increase in the past six months, indicative of a mild softening in foreign demand.

China's Caixin PMI report highlights a continuing economic recovery, evidenced by steady trends in production, demand, employment, and prices, alongside robust export performance. The Caixin Manufacturing PMI has maintained an expansionary stance for eight consecutive months. However, challenges persist in the form of inadequate market confidence and tepid effective demand. Moving forward, policy reinforcement is essential. Key areas of focus should include refining real estate regulations, undertaking extensive equipment upgrades, replacing outdated consumer goods, and advancing the "three major projects" — encompassing affordable housing, urban village renewal, and dual- use public facilities designed for both daily and emergency use. Moreover, fiscal and tax reforms should aim at fostering more positive expectations among market participants.

Amid ongoing support from factors such as an underperforming CNY (Yuan), export price deflation, and the low base effect from last year's decline, coupled with the observed export growth in the recent months, we anticipate a positive trajectory for China's export growth throughout 2024. However, the outlook remains cautious due to weakening infrastructure investment and persistent challenges in the property sector. We assert that exports alone may not suffice to drive a robust recovery without stabilisation in the property market. We maintain cautious expectations regarding the forthcoming Third Plenum of the 20th Central Committee scheduled for 15-18 July, with markets likely needing to await the end-July Politburo meeting for distinct updates on short-term economic policy.

In June, Taiwan's manufacturing sector experienced accelerated expansion, with the PMI climbing to 53.2 from 50.9 in the previous month, marking the highest reading since March 2022 and the third consecutive month of improved operating conditions. The S&P Global report noted a broad-based uptick in demand, with sales increasing from both domestic and international sources. Notably, new export orders rose significantly for the first time since February 2022, driven by heightened demand from Europe, Southeast Asia, and the United States. In contrast, Japan's manufacturing production saw a marginal increase at the end of 2Q24, supported by sustained job creation, backlog clearance, and stock-building efforts. Business sentiment in Japan reached its highest point of 2024, yet overall demand conditions remained weak, as evidenced by ongoing contractions in total new orders and international sales. Concurrently, price pressures intensified. The au Jibun Bank Japan Manufacturing PMI settled at the neutral mark of 50 in June, down from 50.4 in May.

In June, the ASEAN manufacturing PMI remained stable at 51.7, consistent with May's reading and comfortably above the neutral 50.0 mark. This marks the sixth consecutive month of modest improvements in business conditions. According to S&P Global's June PMI data, the ASEAN manufacturing sector exhibited sustained enhancements in operating conditions as we reached mid- year. Strengthening demand conditions fuelled solid increases in manufacturing output and purchasing activity. Additionally, job creation was noted for the first time in three months. On the pricing front, both cost burdens and output charges accelerated in June, with inflation rates nearing their long-term averages. Close monitoring of the PMI price indicators in the second half of the year is warranted, as escalating inflationary pressures could necessitate maintaining elevated central bank policy rates for an extended period.

MALAYSIA’S PMI REGISTERED BELOW THE 50-POINT MARK IN JUNE

The Malaysian manufacturing sector's performance remained broadly stable at the close of 2Q24. For the second consecutive month, new orders increased, bolstered by a rise in exports, though overall demand continued to be weak. Consequently, firms slightly reduced production after an uptick in May and maintained steady staffing levels. Business confidence declined to a ten-month low. Input cost inflation remained stable, with prices rising solidly. Firms, in response, increased their charges at the fastest pace since September 2022. The seasonally adjusted manufacturing PMI registered at 49.9 in June, marginally below the neutral 50.0 mark, indicating stable business conditions for the month. However, this reflected a slight deterioration from May when the PMI was at 50.2, suggesting marginally improved operating conditions.

The average PMI reading for 2Q24 reached its highest level since 3Q22, suggesting a positive trajectory for economic growth throughout the quarter. This data indicates that the robust expansion reflected in recent official manufacturing production figures has continued beyond April. Looking ahead, new order growth is anticipated to remain steady over the next year, underpinning a favourable outlook for manufacturing production. However, business sentiment has declined for the fifth consecutive month in June, reaching its lowest point since August 2023, which may temper some of the optimism.

OUTLOOK

In April, global semiconductor sales rose by 1.1% MoM, marking the first positive monthly growth of the year and signalling increasing market momentum. Throughout 2024, the sector has consistently achieved double- digit YoY gains each month. The latest industry forecast indicates robust annual growth, with sales in the Americas and Asia Pacific expected to increase by 25.1% and 17.5%, respectively. The World Semiconductor Trade Statistics (WSTS) has revised its global semiconductor market growth forecast upwards to 16%, exceeding the previous estimate of 13.1%. For 2025, WSTS anticipates a growth rate of 12.5%, bringing the market to an estimated US$687bn. This optimistic outlook is particularly significant for Malaysia's manufacturing sector, where E&E exports account for over 40% of total exports. As the 10th largest global exporter of E&E products and the 6th largest exporter of semiconductors in 2023, Malaysia is poised to benefit substantially from these favourable projections. Malaysia accounts for 7% of global semiconductor trade and 13% of back-end operations.

In the near term, the elasticity of global trade in response to global output is expected to remain subdued compared to pre-pandemic levels, primarily due to tepid investment growth and widespread trade restrictions. The outlook for global trade is clouded by various downside risks, including weaker-than- expected global demand, escalating geopolitical tensions, and further disruptions in maritime transport. Upcoming elections in numerous countries add another layer of uncertainty, potentially leading to more protectionist trade policies that could dampen trade prospects and economic activity. Recent incidents such as attacks on commercial vessels in the Red Sea and climate- induced disruptions in the Panama Canal have affected maritime transit and freight rates along these crucial routes. Despite these challenges, global supply chain pressures and delivery times have not significantly worsened, with adverse effects largely confined to specific regions and industries.

Despite prevailing downside risks, an anticipated increase in electronics exports, coupled with favourable base effects, is expected to mitigate some negative impacts. We forecast Malaysia’s exports of goods and services to rise by +5.4% YoY in 2024. Additionally, we project global GDP growth to reach 3.0% in 2024. Malaysia’s high trade openness, demonstrated by a merchandise trade-to-GDP ratio of 144.7% in 2023, highlights its susceptibility to global economic fluctuations. However, Malaysia has dropped seven positions in the IMD World Competitiveness Ranking 2024, now ranking 34th out of 67 countries, down from 27th last year. Regionally, Malaysia has fallen four places in the Asia-Pacific, now ranking 10th out of 14 countries. Prime Minister Datuk Seri Anwar Ibrahim recently noted that the failure to implement targeted subsidies is a significant factor contributing to Malaysia's decline in the IMD World Competitiveness Rankings 2024.

The World Trade Organization (WTO) projects global merchandise trade to grow by 2.6% in 2024 and 3.3% in 2025, following a 1.2% contraction in 2023 and a 3.0% expansion in 2022 despite the Ukraine conflict. High energy prices and inflation dampened demand for trade-intensive goods last year, but as inflation eases and real household incomes improve, demand is expected to recover over the next two years. The 2023 decline masked regional variations: sharp import declines in Europe, decreases in North America, flat demand in Asia, and increases in major fuel-exporting economies. If forecasts hold, Asia is expected to drive trade volume growth in 2024 and 2025. However, considerable uncertainty persists due to global economic risks, including conflicts and protectionism, with 2024 trade growth potentially ranging from 5.8% to -1.6%.

Source: PublicInvest Research - 2 Jul 2024