• Malaysia manufacturing conditions deteriorate in March

• Global manufacturing PMI eases to five-month low in March

• US manufacturing activity expands but at a marginally slower pace

• Eurozone manufacturing falls to eight-month low

• UK manufacturing growth hits one-year low

• Divergence in China manufacturing survey

• Japan manufacturing PMI eases further

• ASEAN manufacturing PMI indicates stagnation in March

Malaysia’s manufacturing conditions deteriorate in March

Malaysia’s manufacturing PMI declined to 49.5 in March of 2018 from 49.9 in a month earlier. It was the second straight month of contraction in manufacturing activity, as output shrank for the first time in eight months, new export orders dropped for the second straight month and sentiment eased to the weakest so far in 2018 and was slightly weaker than the series average. In addition, purchasing activity decreased solidly and new orders continued to decrease. Meantime, employment grew marginally. On the price front, price pressures continued to escalate, with both input and output prices rising at faster rates. Moving ahead, entry into new markets, more projects and expected improvements in demand supported optimism among manufacturers that output will increase over the coming 12 months. However, the level of positive sentiment eased to the weakest in 2018 so far and was slightly weaker than the series average. The latest manufacturing PMI figure was broadly in line with the long-run series average (49.4) since July 2012.

Outlook. Central to the downward movement in the headline PMI was a fall in manufacturing production for the first time in eight months due to lower order book volumes. That said, the rate of contraction was marginal. The poor performance in the sector was also driven by a decline in new business placed at Malaysian manufacturing firms. On the other hand, January’s Industrial Production rose 3.0% yoy as manufacturing production grew at a credible 4.8% yoy underpinned by domestic and export-oriented industries. As a result, manufacturing sales climbed strongly by 10.8% yoy in January. Adding to this, January’s export expanded 17.9% yoy, fuelled by a stronger demand for electrical and electronic (E&E) products and commodities. We expect the domestic economy to remain resilient in 2018 supported by the manufacturing sector.

Global manufacturing PMI eases to five-month low in March

The rate of expansion in the global manufacturing sector eased to a five-month low in March, as companies reported slower growth of output, new orders and employment. The J.P.Morgan Global Manufacturing PMI posted 53.4 in March, down from 54.1 in February and its lowest reading since October 2017. The average level for 1Q18 (54.0) was nonetheless unchanged from the prior quarter. March data signalled slower rates of expansion in both the consumer and intermediate goods sectors, with growth at three- and seven-month lows respectively National PMI data signalled expansions in almost all the nations covered, with only South Korea, Malaysia and Thailand seeing contractions. Growth slowed in the Eurozone, China, Japan, India and Australia, but improved in the US, the UK, Brazil and Russia

US manufacturing activity expands but at a marginally slower pace

The Institute for Supply Management (ISM) index of manufacturing for March shed 1.5 points to 59.3. Despite the decline, the index remains in expansionary territory for the 19th consecutive month. The three largest declines that drove the fall in the headline index occurred in the employment (-2.4 to 57.3), new order (-2.3 to 61.9) and inventories (-1.2 to 55.5) sub-indices. Prices paid rose 3.9 points to 78.1, a new cycle high and the highest since April 2011 (82.6). The spread between new orders and inventories – a good leading indicator of activity – narrowed to 6.4 (-1.1 points) in March. Overall this indicator remains consistent with manufacturing activity continuing to expand through the first half of 2018.

Separately, IHS Markit survey data signalled a strong overall improvement in operating conditions across the US manufacturing sector. The manufacturing PMI registered 55.6 in March, up from 55.3 in February. The latest PMI reading indicated the strongest improvement in manufacturing business conditions since March 2015. Output and new orders continued to rise markedly, despite rates of growth softening slightly since February. Job creation also remained strong and backlogs of uncompleted work increased solidly as a result of the recent upturn in client demand. Business confidence about the year ahead meanwhile rose to the highest since February 2015.

After a string of positive surprises, it was just a matter of time before US manufacturing sector take a step back. The breadth of growth and building price pressures suggests that demand for US manufactured goods remains robust. Comments by survey respondents were generally positive, but indicate shortages of components and labor are starting to have an impact by creating production and shipping delays. Tariffs on steel and aluminum announced by the US administration last month already appear to be driving up prices. Although many of the largest exporters of steel to the US are exempt from tariffs at least until May 1st, survey respondents have reported 'panic buying' which is helping drive prices of steel and aluminum higher and resulting in some shortages. Moreover, tariffs announced by the US administration on steel and aluminium, as well as tariffs against imports from China of aerospace, information and communication, and machinery could deal a blow to business confidence both domestically and abroad. Overall, higher prices and trade-related uncertainty could act to slow global demand for US manufactured goods, and could partially offset the boost to US economic growth expected from tax reform and fiscal stimulus.

Eurozone manufacturing falls to eight-month low

Activity in the Eurozone manufacturing sector fell to an eight-month low in March as the PMI printed at 56.6, down from February's final reading of 58.6, with a slowdown across all nations and manufacturing sub-sectors. The headline was constrained by big declines in all the major Eurozone economies, which extended the bout of weakness in the February data. New orders and output rose at their slowest rates since November 2016, and export orders slid to a 15-month low. End-demand almost certainly is slowing, but manufacturers in the Netherlands and Germany also report that capacity constraints are to blame for the slowdown in production, primarily due to a sharp rise in suppliers’ delivery times. Some firms in the northern regions also noted that bad weather had disrupted activity. In addition, inflation pressures are also still on the rise, due to constraints on capacity and supply of raw materials.

UK manufacturing growth hits one-year low

Britain’s buoyant manufacturing industry lost some steam in the first three months of 2018 that suggested the economy remains on a slow but steady course a year ahead of Brexit. UK manufacturing PMI inched up to 55.1 in March from a downwardly revised 55.0 in February. But January’s reading was also revised lower and for the first quarter as a whole, the PMI was its lowest in a year, though above its average since Britain exited recession in 3Q09 following the financial crisis. This suggested factory output rose at a quarterly rate of about 0.4% to 0.5%, slowing from 1.3% in 4Q17. Manufacturing, which accounts for about 10 percent of Britain’s economy, was a relative bright spot late last year, when economic growth was the weakest among the Group of Seven rich nations. The slowdown was due in large part to weaker consumer demand caused by higher inflation after June 2016’s Brexit vote knocked sterling lower.

Divergence in China manufacturing survey

The March manufacturing PMI sent mixed signals on China’s economy, with the official PMI increased whilst Caixin PMI declined as large companies saw a modest pickup in growth, while small firms' activity expanded marginally after shrinking in February. The manufacturing PMI published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP), rose to 51.5 in March, from 50.3 in February. February's print had been the lowest in 1.5 years, but it was due to disruptions related to the long Lunar New Year holidays, not a sharp drop in consumption. Indeed, the March survey showed manufacturers shifted into higher gear as usual as seasonal demand picked up at home and abroad. The sub-index for output jumped to 53.1 from 50.3 in February, while total new orders rose to 53.3 from 51.0 and export orders climbed to 51.3 from 49.0. Helping drive positive sentiment, exports have been better than expected in the first two months of the year, particularly for tech products, the fastest-growing segment of China's industrial sector.

Meanwhile, the Caixin Manufacturing PMI unexpectedly fell to 51.0 in March from 51.6 in the prior month. It is the weakest reading since November 2017, as both output and new orders grew the least in four months and new export orders rose marginally. At the same time, buying activity continued to rise while confidence improved to a one-year high. Meanwhile, employment contracted the most in seven months, leading to a further rise in backlogs of work. On the price front, input costs increased the least in nine months while firms raised their selling prices marginally. Overall, the manufacturing PMI reading in March showed that demand was not as strong as expected, leading to lower willingness of manufacturers to produce and restock.

Japan manufacturing PMI eases further

Japanese manufacturing activity expanded at a slightly slower pace in March as growth in new orders and output moderated slightly though the economy overall remained in solid shape. Japan manufacturing PMI fell to 53.1 in March on a seasonally adjusted basis, below a final 54.1 in February.

The headline reading fell for the second consecutive month, but remained above the 50 threshold that separates contraction from expansion for the 19th executive month. The overall picture remains upbeat as the reading of 53.1 still indicates a fairly solid pace of improvement in business conditions

ASEAN manufacturing PMI indicates stagnation in March

The Nikkei ASEAN manufacturing PMI slipped to 50.1 in March from 50.7 in February, as slower rises in both output and new order volumes, alongside inventory depletion and largely stagnant employment weighed. Input cost inflation remained marked in March, with the pace of increase accelerating to the greatest for almost a year. March data pointed to mixed manufacturing sector performances across the monitored ASEAN nations.

Four of the seven countries covered by the survey indicated an improvement in business conditions, down from five in the first two months of 2018. Myanmar displaced Vietnam to lead the ASEAN manufacturing rankings, as growth in its manufacturing sector picked up to a solid pace. Vietnam slipped to second position, having registered a slower improvement in operating conditions, while the Philippines climbed to third place as adverse effects on demand from recent tax reforms showed signs of fading. Indonesia saw slower growth in its manufacturing economy while Malaysia reported weaker business conditions. Thai manufacturers signalled a deterioration in operating conditions for the first time since last October.

Singapore remained in contraction, though the rate of deterioration was the slowest seen for five months. Elsewhere in Asia, Taiwan’s manufacturing PMI edges down to five-month low in March. At 55.3 in March, the headline seasonally adjusted PMI dipped slightly from 56.0 in February. Still, Taiwan’s manufacturing sector continued to expand at a solid pace at the end of 1Q18, despite the headline PMI posting at a five-month low in March. The South Korean manufacturing economy concluded the first quarter of 2018 with a slight deterioration as the manufacturing PMI declined to 49.1 in March, from 50.3 in February. This signalled the most marked deterioration in business conditions for South Korean manufacturers since July 2017.

Source: BIMB Securities Research - 4 Apr 2018