OVERVIEW

The ASEAN manufacturing PMI held steady at 51.6 in July, remaining above the neutral 50.0 mark for the seventh consecutive month, indicating sustained expansion. Malaysia's PMI dipped slightly to 49.7 in July from 49.9 in June, reflecting a marginal softening in the sector’s health. Conversely, Thailand's PMI climbed to a 13-month high of 52.8 in July, up from 51.7 in June, signalling robust improvement in manufacturing performance. The Philippines recorded a PMI of 51.2 in July, nearly matching June's 51.3, marking the eleventh consecutive month of enhanced operating conditions. Vietnam’s PMI remained at 54.7 in July, indicating strong business conditions, the highest growth since November 2018. Notable improvements were observed across the consumer, intermediate, and investment goods categories, underscoring broad-based sectoral strength.

Malaysia's manufacturing sector is set for positive growth this year, underpinned by optimistic global semiconductor market forecasts. E&E exports, which constitute over 40% of Malaysia's total exports, are anticipated to be a key driver. Despite geopolitical tensions and economic uncertainties among major trading partners, Malaysia's exports are projected to increase by 5.4% YoY in 2024. The positive outlook is bolstered by enhanced economic governance and an improved competitiveness ranking. Malaysia's PMI is expected to align with global trends, surpassing the 50-level mark in 2H24, assuming the stabilisation of global uncertainties.

SURPASSED THE 50-EXPANSANIONARY LEVEL GLOBALLY IN JULY

The Caixin China General Manufacturing PMI fell to 49.8 in July, down from 51.8 in June, indicating a marginal deterioration in operating conditions for the first time in nine months. The contraction below the 50.0 neutral mark reflects the slowest expansion in manufacturing output in this period, driven by a decline in new orders, the first in a year. The Caixin China’s PMI report attributed this to subdued demand and reduced client budgets. While export orders continued to grow, the rate decelerated to a modest pace compared to June. Despite these challenges, sentiment within the sector remained positive, with confidence levels rising from June's low. Firms are optimistic that business development efforts and new product launches will drive sales in the coming year, highlighting resilience amid ongoing market fluctuations.

The Third Plenum of the 20th Central Committee of the Communist Party has laid out a strategic roadmap for deepening comprehensive reforms and advancing Chinese modernisation, setting the stage for high-quality economic development. Despite this, 2Q24 real GDP growth slowed to 4.7% YoY, significantly below market expectations following a strong 1Q24. This slowdown challenges the annual growth target of around 5%, underscoring persistent issues such as insufficient domestic demand and weak market optimism. To address these challenges, policy efforts must prioritise stabilising growth, enhancing employment, protecting livelihoods, and intensifying policy stimulus. Ensuring effective implementation of existing policies and unlocking market potential will be critical to revitalising economic momentum and achieving sustainable growth.

We anticipate a positive trajectory for China's export growth for this year. 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. At the recent Politburo meeting, officials acknowledged the economy's uneven performance and pledged to enhance countercyclical policy measures, though they exhibited minimal urgency in deploying immediate stimulus actions. We opine that GDP growth may slow in 2H24 from 5.0% in 1H24, due to new headwinds and ongoing difficulties in the property sector. More significant policy measures are expected to emerge in 4Q24 as concerns about the slowdown become more pressing. This scenario highlights the critical need for timely and effective policy responses to sustain economic momentum and stability.

In July, Taiwan's manufacturing sector maintained solid growth, bolstered by a broad-based increase in demand from both domestic and international markets across Asia, Europe, and North America. The S&P Global Taiwan PMI remained above the critical 50.0 threshold for the fourth consecutive month, registering 52.9, a slight decrease from June's 53.2. Conversely, Japan's manufacturing sector exhibited a downturn at the onset of 3Q24. The au Jibun Bank Japan Manufacturing PMI fell from the neutral 50.0 in June to 49.1 in July, marking the sector's first contraction since April. This decline, driven by a sharper reduction in new orders, led to a renewed drop in production levels. Although the reduction was modest, it was the steepest in four months, signalling a notable deterioration in the sector's health.

In July, the ASEAN manufacturing PMI held steady at 51.6, a marginal change from June’s 51.7, marking the seventh consecutive month of modest improvement in manufacturing conditions. According to S&P Global's data, business activity and new order volumes continued their expansionary trends at the start of 3Q24, prompting a slight increase in employment for the second consecutive month. However, manufacturers faced heightened input costs, with the inflation rate reaching its highest since February. The sustained growth in the ASEAN manufacturing sector from 1H24 carried into 2H24, with demand conditions strengthening and new orders hitting a 15-month high, which supported robust production growth in July. Despite this, the report highlights that the resurgence of inflationary pressures could pose challenges, suggesting that regional central banks may maintain a cautious stance on policy rates to curb potential headwinds to growth.

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

The Malaysian manufacturing sector experienced a slight moderation in July, reflecting subdued domestic demand conditions. Key metrics such as new orders, output, employment, and inventory levels exhibited slowdowns. However, firms noted an uptick in international demand, evidenced by a further increase in new export orders. On the pricing front, input cost inflation accelerated at the beginning of 3Q24, reaching an eight-month high. This surge in input costs led to the most significant rise in output prices since September 2022. The seasonally adjusted S&P Global Malaysia Manufacturing PMI edged down from 49.9 in June to 49.7 in July. This reading indicates a marginal contraction in the sector's overall health.

The PMI for 2Q24 suggests ongoing growth, albeit at a potentially slower pace compared to previous quarters. Despite this, YoY official manufacturing production may experience a deceleration. Optimism for a demand rebound bolstered confidence levels at the start of 3Q24, with expectations for a 12- month output improvement. Confidence reached its peak since March, yet it remained below the long-term average of 56.3, reflecting persistent uncertainties around the timing of a domestic demand recovery.

OUTLOOK

In May, global semiconductor sales rose by 4.1% MoM and 19.3% YoY, marking the most significant YoY increase since April 2022. The global semiconductor market has consistently grown YoY throughout each month of 2024. The Americas market demonstrated robust performance with a remarkable 43.6% YoY sales increase. In May, 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 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 Aug 2024