• Malaysia’s manufacturing PMI ticks higher in July

• Global manufacturing growth slows

• US manufacturing activity decelerates in July

• Eurozone manufacturing growth remains subdued

• UK manufacturing growth slows in July

• China manufacturing activity growth weakens in July

• Japan's manufacturing sector growth slows to 11-month low

• ASEAN manufacturing growth slows further

Malaysia’s manufacturing PMI ticks higher in July

The manufacturing sector in Malaysia continued to contract in July, albeit at a slower rate, with a five-month high PMI score of 49.7, up from 49.5 in June. The latest data signalled a broad stabilisation in Malaysian manufacturing conditions in July, primarily driven by output rising for the first time in five months although the latest upturn was only marginal. Meanwhile, new orders placed at Malaysian manufacturing companies decreased for the sixth consecutive month in July however the rate of contraction remained modest. In contrast, new export orders rose for the first time in six months during July supported stronger demand from key international markets. In response to greater output requirements, firms engaged in staff recruitment for the second consecutive month. Employment has risen eight times in the past nine months. However, the rate of job creation remained only marginal. Input prices faced by Malaysian manufacturing companies rose during July, thereby stretching the current period of inflation to 42 months. Currency weakness reportedly led to higher import costs.

Outlook. Latest manufacturing PMI data signalled a broad stabilisation in manufacturing conditions across Malaysia. Meanwhile, the Industrial Production Index (IPI) recorded 3.0% yoy gain in May, driven by the increase in manufacturing index by 4.1% (Apr: 5.3%). Export grew considerably slower by 3.4% yoy in May after surging 14.0% in the preceding month. Nonetheless, the contraction in import growth indicates that domestic activities, in particular investment among firms are gradually taking a backseat as companies are taking a cautious view to expand its production capacity. This was premised on rising inventory level amidst uncertainty on the external demand outlook. The difference between manufacturing production and manufacturing sales growth had increased (May: -1.5%; Apr: -2.9%), suggesting inventory level has been building up. Additionally, employment growth in the manufacturing sector is also growing at a slower pace and this would also mean manufacturers have become increasingly wary to ramp up their production lines in order to avoid excessive inventory level. The latest data suggest that the production activities are gradually shifting into a lower gear. At this juncture, it is really important to be cautious with what is happening in the US trade policies.

Global manufacturing growth slows

The rate of global manufacturing expansion slowed again at the start of the third quarter. The headline JPMorgan Global Manufacturing PMI posted its lowest reading for one year as it fell to 52.7 in July, down from 53.0 in June. According to IHS Markit, July PMI data signalled a further slowdown in the rates of expansion of both output and new orders. The manufacturing upturn has lost sizeable momentum since the start of the year. However, with final demand growth having firmed in recent months and signs that an inventory drag is nearing an end, output gains is expected strengthen in coming months.

The US remained one of the strongest performing national manufacturing sectors in July. Although the US PMI dipped to a five-month low, it remained at a solid level and comfortably above the global average. The euro area was also a bright spot, achieving a rate of expansion close to that of the US. That said, the Eurozone PMI is currently much lower than the highs scaled before the turn of the year. Growth across Asia remained subdued compared to that seen in Europe and the US. PMI readings for China, Japan, India, South Korea, Indonesia, Malaysia, the Philippines, Myanmar and Thailand were all below the global average. Among the two largest Asian economies, growth slowed to an eight month low in China and 11-month low in Japan.

US manufacturing activity decelerate in July

After two consecutive months of increases, the Institute for Supply Management (ISM) manufacturing PMI pulled back by 2.1 percentage points to a still heady 58.1 in July from 60.2 in the previous month. The reading pointed to the weakest expansion in the manufacturing sector in three months amid a slowdown in new orders, export orders and production. Demand remains robust but manufacturers keep showing concerns about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.

Separately, IHS Markit manufacturing PMI registered 55.3 in July, down slightly from 55.4 in June. Overall, the latest improvement in the health of the sector was the joint weakest in 2018 to date, but remained strong in the context of historical data. Still, US manufacturing firms signalled a strong improvement in operating conditions in July despite the headline PMI falling to a five-month low, as weaker rises in output and employment were seen in July, while export sales fell for the second month in a row.

July’s report highlights concerns about capacity constraints, which is becoming an increasingly pressing issue for the American economy. Several industries indicated that labor availability has been a problem, as they struggle to fill positions at all levels of their organizations. This is corroborating evidence that a tight labor market is a constraint on economic growth, in line with an unemployment rate that is close to a record low level. Manufacturers continue to feel the squeeze of the tit-for-tat tariff measures. Several indicated rising input costs, particularly relating to steel and aluminium. Others noted a reduction in orders from China as well as administrative delays at customs, when importing from China. Concerns about being able to pass these rising costs on to final consumers, has resulted in tightening profit margins for many.

Eurozone manufacturing growth remains subdued

The performance of the Eurozone manufacturing sector remained subdued at the start of the third quarter. Although the final manufacturing PMI posted 55.1 in July, this was only a minor recovery from June’s 18-month low of 54.9 and over five points below the record high registered at the end of 2017. A marginal uptick in the PMI provides little cause for cheer given it is the second weakest number for more than one-and-a-half years. The past two months have seen the most subdued spell of factory output growth since late-2016. Sector data signalled that business conditions improved across the consumer, intermediate and investment goods sectors, with mild growth upticks signalled in the latter two. Manufacturing PMI for July saw the Netherlands, Germany and Austria remain the strongest-performing nations. Growth improved slightly in the latter two, but eased to a 14- month low in the Netherlands. Rates of expansion also slowed in Italy, Spain and Ireland, whereas acceleration was registered in France. The survey responses indicate that the slowdown likely reflects worries about trade wars, tariffs and rising prices, as well as general uncertainty about the economic outlook. Optimism about the future remained at one of the lowest levels seen over the past two years.

UK manufacturing growth slows in July

UK manufacturing started the third quarter on a softer footing, with rates of expansion in output and new orders losing steam. The manufacturing PMI fell to a three-month low of 54.0 in July 2018 from a downwardly revised 54.3 in the previous month. There was a flat line feel to manufacturing as the sector held its ground, but only just. Overall production slowed, whilst new order growth took a leisurely pace, and it was the unbalanced reliance on export orders that kept the sector afloat with domestic clients keeping their distance. In addition, business optimism dropped to a 21-month low amid uncertainty regarding both Brexit and the exchange rate. The upturn in the sector has eased noticeably since the backend of 2017, meaning that manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far.

China manufacturing activity growth weakens in July

Growth in China’s manufacturing sector slowed in July, as the worsening trade dispute with Washington, bad weather and weaker domestic demand weighed on factory activity. The official PMI released by National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) fell to 51.2 in July, from 51.5 in June. It was also the lowest index reading since February but remained above the 50-point mark that separates growth from contraction for a 24th straight month. Firms were hurt by trade frictions, rain and high temperatures in July, which is also a cyclically slow season for some sectors

Meanwhile, the Caixin Manufacturing PMI fell to an eight-month low of 50.8 in July of 2018 from 51.0 in the previous month. Both output and new orders grew at softer rates, while new export orders shrank at the steepest pace in 25 months.

China's official PMI gauge focuses on large companies and state-owned enterprises, while another set of readings by Caixin and IHS Markit focuses on small and medium-sized enterprises. The manufacturing PMI data showed larger companies continued to expand while small firms contracted at a faster pace in July, highlighting the challenges firms face even amid a years-long government effort to support small companies. Optimism towards the year ahead remained relatively subdued amid concerns surrounding tough market conditions, strict environmental policies and the potential impact of the US-China trade war.

Beijing and Washington have been engaged in a tit-for-tat exchange of punitive measures and threats of measures against each other’s goods. Early July, the United States imposed tariffs on USD34bn of Chinese imports. China retaliated with duties of its own on the same value of American goods. Meanwhile, the US 25% tariffs on the remaining USD16bn of Chinese goods are set to take effect, possibly on 1 Aug, after the United States Trade Representative (USTR) concludes the post-hearing comments by 31 July. Thereafter, the USTR will undertake a two-month review process with hearings starting 20 August for an additional US$200 billion worth of Chinese goods to be subject to 10% tariffs.

However, we expect the negative impact from the US-China trade spat to manifest in economic data released later this year. The US importers have actually been bringing forward their demand for Chinese goods before these tariffs actually hit so that had actually provided some kind of support for Chinese exports. But as we go further into the year, into 2019, that is when we will really start to see demand start to soften and these tariffs actually start to bite a bit more.

Japan's manufacturing sector growth slows to 11-month low

Latest survey data signalled a slowdown to manufacturing sector growth at the beginning of 3Q. Manufacturing PMI in Japan decreased to 52.30 in July from 53.0 in June. Manufacturers observed the slowest rate of improvement in the activity of their sector since August last year as output growth eased and there was a noticeable softening of demand, while export sales failed to record any upswing for a second month running.

ASEAN manufacturing growth slows further

The latest Nikkei PMI survey signalled a loss of growth momentum in ASEAN’s manufacturing sector in July. The manufacturing PMI across ASEAN slipped from 51.0 in June to 50.4 in July, suggesting the current upturn may have reached its peak. The latest reading signalled only a marginal improvement in the health of the sector that was the weakest since March. Survey data showed slower rises in both new orders and output during July. Employment expanded further, but inventories of inputs continued to decline. Overall, July saw five of the seven monitored countries indicating an improvement in manufacturing conditions, while both Malaysia and Myanmar reported deteriorations.

Vietnam maintained its lead in the ASEAN manufacturing PMI rankings, registering another solid improvement in its manufacturing sector in July. Vietnam’s manufacturing PMI posted 54.9 in July, down marginally from 55.7 in June but still one of the highest since the survey began in March 2011. The Philippines moved up to second place despite a noticeably softer pace of growth with a PMI score of 50.9, down from 52.9 in June. Indonesia climbed to third position after registering a slightly faster improvement in operating conditions. The manufacturing sector in Indonesia continued to expand in July with a PMI score of 50.5, up from 50.3 in June. Singapore fell to fourth place, with the health of its manufacturing economy improving at a notably weaker pace than in June. Thailand indicated a broad stagnation in manufacturing conditions in July. The manufacturing sector in Thailand continued to expand in July, albeit at a slower pace, with a PMI score of 50.1 from 50.2 in June. Myanmar joined Malaysia to signal a decline in the health of its manufacturing sector for the first time in ten months. The manufacturing sector in Myanmar swung to contraction in July with a PMI score of 47.9 down from 50.0 in June.

Elsewhere, growth momentum in the Australian manufacturing sector eased noticeably during July. Manufacturing PMI registered 52.4 in July, down from 55.0 in June, to signal a slower rate of improvement in the health of the Australian goods-producing sector. Although growth has been recorded in each month since data collection began in May 2016, the latest rise was the weakest for 23 months. Taiwanese manufacturers signalled the weakest improvement in business conditions for over a year in July. At 53.1 in July, headline PMI posted above the neutral 50.0 value to signal an improvement in the health of the sector for the twenty-sixth month running. However, the reading was down from 54.5 in June to indicate the slowest rate of growth since May 2017. The health of the South Korean manufacturing sector continued to deteriorate at the beginning of the third quarter. The manufacturing PMI recorded 48.3 in July, from 49.8 in June. The headline index has now recorded below the 50.0 mark for five straight months. The recent improvement in Indian manufacturing conditions lost some impetus in July as manufacturing PMI dropped to 52.3 in July of 2018 from a six-month high of 53.1 in the preceding month.

Source: BIMB Securities Research - 2 Aug 2018