• Recovery seen in Malaysia manufacturing sector

• The global manufacturing sector continued to strengthen in March

• Euro area, US and Taiwan lead global growth rankings

Recovery seen in Malaysia manufacturing sector

The IHS Markit Malaysia Manufacturing PMI increased to 49.9 in March of 2021 from 47.7 in February. This was the eighth straight month of contraction in the sector but the smallest contraction in the current sequence, with the headline Index reaching its highest since July 2020. Although production levels and new orders moderated further due to weak demand and ongoing supply chain disruption from the COVID- 19 pandemic, employment levels returned to expansion territory for the first time since March 2020 as preparation for orders in the future reportedly required additional capacity and pushed the seasonally-adjusted employment index to the highest since April 2019 as the global economy contended with the impact of the COVID-19 pandemic. IHS Markit said despite headwinds from supply shortages and ongoing COVID-19 related issues, Malaysian manufacturers grew increasingly optimistic about the year-ahead outlook, with hopes that an end to the pandemic would give rise to a wider recovery in demand. On the other hand, while survey gauges of output and new orders both rose in March, the latter notably hitting a five month high, both remained subdued. Panellists noted that order inflows continued to be dampened by the impact of the COVID-19 pandemic, hitting both consumer and corporate demand. Foreign demand for Malaysian manufactured goods also fell back, albeit with the pace of the reduction easing to the softest recorded since June 2020 as some firms reported returning orders in Asia and the Americas. Input costs meanwhile increased for the tenth consecutive month in March, reflecting higher prices for a broad variety of raw materials and higher freight costs. The overall rate of input cost inflation accelerated to the fastest in nearly four years. Manufacturers sought to partially pass these higher costs on to clients in the form of higher output charges, which rose at the quickest pace since March 2017. Malaysian manufacturers displayed a stronger degree of optimism regarding the outlook for output in the coming year. Firms recorded the highest level of positive sentiment for six months in March.

Outlook. Malaysia Manufacturing PMI rose from 47.7 in February to 49.9 in March. The latest reading pointed to a stabilisation in operating conditions, with the headline index reaching its highest since July 2020. Looking at the historical relationship between the PMI and official statistics, the latest reading is representative of annual growth in both industrial production and GDP, although the survey indicates that the manufacturing sector is only gradually recovering from the impact of the pandemic. Meanwhile, despite the MCO and a shorter working month, Malaysia’s exports extended its expansion substantially to 17.6% yoy in Feb from +6.6% in Jan. This marked the biggest gain since Oct 2018 and brought year-to-date increase in exports to 11.7% yoy in the first two months of 2021. January IPI registered +1.2% yoy, driven by higher activities in the manufacturing segment. Growth in industrial production and exports showed that the impact from MCO 2.0 was minimal. Malaysia’s trade in the first two month of the year is consistent with continued economic recovery which is being led by improving external demand where exports have outperformed the recovery in imports so far. The manufacturing sector is expected to record robust growth as the COVID- 19 pandemic accelerates the structural shifts towards digitalisation, spurring demand for telecommunications, cloud computing and medical device products. Malaysia’s E&E cluster will stand to benefit as it is well integrated in these global value chains. Malaysian exports are expected to remain resilient, mainly in the E&E sector supported by robust semiconductor demand. Pent-up demand and vaccination rollout worldwide will likely provide further support to the growth recovery in Malaysia this year.

The global manufacturing sector continued to strengthen in March

The performance of the global manufacturing sector continued to strengthen in March consistent with the idea that global activity is rebounding as vaccinations become more available. The J.P. Morgan Global Manufacturing PMI rose to 55.0 in March, a 121-month high and its best reading since February 2011. The level of the PMI was supported by stronger growth of output, new orders and employment. A slower decrease in stocks of purchases and lengthening of vendor lead times also had a positive impact. Sub-sector PMI data indicated that operating conditions improved across the consumer, intermediate and investment goods industries in March. The highest PMI reading was for intermediate goods (121-month high) followed closely by investment goods (two-month low). Growth improved to a 37-month record in the consumer goods category. Manufacturing production increased at one of the quickest rates over the past decade, underpinned by the strongest expansion of incoming new work for just over a decade. International trade flows also picked up pace, with growth of new export business the steepest since January 2018. The new orders to finished goods inventory ratio at 1.2 stood out as it marked a high since 2010 suggesting strength in the manufacturing sector near-term. However, the high ratio also likely reflects bottlenecks and supply-chain disruption which are feeding into pricing. Both the input and output prices PMIs increased again in March with the output prices PMI marking a record high in the series that dates back to 2009.

Manufacturing rises across the board

PMI readings were above 50.0 – signalling improvement – in 23 out of the 27 surveys for which March data were available. Five of the six top-ranked nations were located in the euro area (Germany, the Netherlands, Austria, Italy and France), taking the combined PMI for the currency bloc to its highest on record, with unsurpassed readings also registered in both Germany and the Netherlands. Outside the euro area, the strongest improvements were seen in Taiwan and the US. Improvements were signalled for Japan and China, but both PMIs were below the global average.

Euro area headline manufacturing PMI surged to 62.5, up from February’s 57.9 and indicative of a considerable strengthening of sector performance. The index has now registered above the 50.0 no-change mark for nine months in succession. Although centred on Germany, which saw a particularly strong record expansion during the month, the improving trend is broad based across the region as factories benefit from rising domestic demand and resurgent export growth. Meanwhile, March saw US manufacturers struggle to cope with surging inflows of new orders. Although output continued to rise at a solid pace, capacity is being severely strained by the combination of soaring demand and supply chain disruptions. Still, the IHS Markit US manufacturing PMI posted 59.1 in March, up from 58.6 in February. The latest reading was the second-highest on record and signalled a marked improvement in operating conditions across the US manufacturing sector. Separately, the ISM manufacturing PMI jumped to 64.7 in March of 2021 from 60.8 in February, the highest reading since December of 1983. Overall, the PMI indicates that factory activity across the US is expanding strongly, which also signalled that the US overall economic activity is growing.

Japan’s PMI for its manufacturing industry for March touched a new high since October 2018, and up for the second month by another 1.3 basis points on month to 52.7, indicating the continuing recovery among the Japanese manufacturers from the impact of the COVID-19 pandemic. Meanwhile, the UK saw a marked expansion of production after output came close to stalling in January and February with the manufacturing PMI rose to a decade-high of 58.9 in March, its best outcome since February 2011.

The Caixin China General Manufacturing PMI came in at 50.6 in March, down from 50.9 the previous month. The March reading was the lowest since April 2020, despite marking the 11th consecutive month of expansion. That indicates the post-epidemic recovery was continuing to falter. On the other hand, China's March official manufacturing PMI expanded to the highest level this year after a slight dip in the previous month, indicating a recovery of the manufacturing sector as domestic consumption climbed and global demands rose. The official manufacturing PMI released by National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) stood at 51.9 in March, up 1.3 percentage points compared with 50.6 percent in February. In January, the PMI stood at 51.3. China's manufacturing sector has now remained in expansion territory for 13 months in a row. Overall, the manufacturing sector continued to recover in March and China's PMI is expected to remain in expansion territory throughout the year of 2021, with help of global economic recovery and rising consumption demand domestically.

Elsewhere in Asia, Thailand's 2021 manufacturing downturn continued in March with the PMI remained below 50.0 for the third successive month in March, rising from 47.2 in February to 48.8. March data completed a full quarter of negative PMI readings for Thailand's manufacturing sector, underlining a weak start to 2021. The PMI averaged 48.4 in the first quarter, down from 50.7 in 4Q20 and broadly in line with 3Q20 (48.5). The Indonesian manufacturing sector ended the first quarter of the year on a high with the IHS Markit Indonesia Manufacturing PMI posted 53.2 in March, up from 50.9 in February and the highest reading since the survey began in April 2011. The Taiwan Manufacturing PMI increased from 60.4 in February to 60.8 in March, to indicate a rapid improvement in the health of the sector. Notably, the reading was the highest recorded since March 2010 and marked a further recovery from the coronavirus disease 2019 (COVID-19) related downturn last year. March PMI data rounded off the best quarterly performance for Taiwan's manufacturing sector for 11 years, with firms recording substantial gains in both output and sales.

Global manufacturing employment rose for the fifth consecutive month in March, and to the greatest extent since November 2018. Job growth was registered in almost all of the nations covered, with notable exceptions being decreases in China and Brazil. Business optimism dipped slightly from February's 81-month high.

Source: BIMB Securities Research - 2 Apr 2021