• Malaysia manufacturing activity drops for the third month running

• Global manufacturing recovery continues at end of third quarter

• Strong manufacturing activity in the US will continue in coming months

• Eurozone manufacturing growth strongest for over two years

• UK manufacturers continue recovery from COVID-19 slump

• China’s manufacturing activities remain solid

• Japan manufacturing PMI reaches seven-month high

• ASEAN manufacturing sector deteriorate further in September

Malaysia manufacturing activity drops for the third month running

The IHS Markit Malaysia manufacturing PMI dropped to 49.0 in September 2020 from 49.3 in a month earlier and falling for the third month running following June's rebound. This was the second straight month of contraction in the sector, amid restriction measures aimed at curbing the spread of the ongoing coronavirus pandemic. The production trend deteriorated, while new orders continued to weaken in September, although the pace of moderation was the softest in 2020 so far. Total new business was again negatively impacted by a reduction in new export orders amid ongoing COVID-19 disruption. With new orders slowing further, manufacturers scaled back output for the first time in four months, following a stable picture in August. At the same time employment declined for the sixth month running, albeit at a slower pace than the series record posted in August. Input costs increased for the fourth successive month at the end of the third quarter, often reflecting raw material shortages. Efforts to pass on higher input costs to customers were hampered by demand weakness. As a result, manufacturers raised their selling prices only slightly during September. That said, charges have now increased in four consecutive months. The impact of COVID-19 on global supply chains was evident again as issues with the shipping of items and delays linked to restrictions in certain countries were mentioned by those firms that saw lead times lengthen. On the other hand, September saw increasing confidence in the 12-month outlook for production. Sentiment jumped to a nine month high, with firms predicting improvements in new orders as market conditions gradually return to normal.

Outlook. The recovery in the Malaysian manufacturing sector shows signs of losing momentum as the PMI posted 49.0 in September, down fractionally from 49.3 in August. However, according to the IHS Markit, historical comparisons indicate that the survey remains broadly consistent with both manufacturing output and GDP expanding at annual rates in excess of 4%. Moreover, the order book trend is showing signs of having bottomed out and future output expectations surged to the highest seen so far this year as growing numbers of companies considered the worst of the crisis to be behind them. Barring any further marked increases in infection rates, COVID-19 related restrictions are due to ease further in the coming months, according to IHS Markit’s COVID-19 Containment Index, which should further facilitate the manufacturing recovery. Meanwhile, Malaysia’s external trade performance registered a contraction for the first time in 2H20 (Aug: -2.9% yoy; Jul: ++3.1%) while the IPI increased by 1.2% yoy in July (Jun: -0.4%) after posted negative print for four straight months. Weakness in manufacturing exports was reflected in the weaker PMI data and the latest PMI numbers suggest that the manufacturing sector faces challenging operating conditions in the months ahead. This indicate that the recovery period would take quite some time amid rising number of coronavirus infections particularly in Sabah state. Whether a robust recovery will take root depends to a large extent on the country's ability to bring the pandemic under control. All-in-all, we view slower exports and IPI as a temporary blip and expect an overall improving trend for the remainder of the year in line with resumption of activities globally. Downside risks to global demand still remain large as most countries are facing high number of new COVID-19 cases. In certain areas, some form of lockdown measures was reinstated, pointing to the possibility of weaker aggregate demand in the future.

Source: BIMB Securities Research - 2 Oct 2020