• Malaysia manufacturing PMI slumps to April 2020 level

• Global manufacturing remained in a strong growth phase in June

• Manufacturing activity remained robust in the US but grew at a slower pace in China and Japan

• Eurozone factory growth at record high

Malaysia manufacturing PMI slumps to April 2020 level

Operating conditions among Malaysian manufacturers dipped to a level not seen since the middle of last year as a renewed Covid-19 wave forced the government to set new restrictions. The headline IHS Markit Malaysia Manufacturing PMI registered a score of just 39.9, down sharply from 51.3 in May and pointed to a sharp decline in business conditions in the Malaysian manufacturing sector.

Both output and incoming orders moderated to the greatest extent since the worst of the initial outbreak of the pandemic in April 2020. Firms commonly attributed the weakness to stricter virus-fighting measures which dampened demand in both domestic and external markets. Foreign demand for Malaysian manufactured goods was subdued, though the pace of reduction in export sales was softer than that seen in total new orders. Businesses widely cited that the latest virus-fighting restrictions had significantly disrupted demand. At the same time, the rate of job shedding was broadly unchanged from May in the latest survey period. Employment levels fell only slightly as firms took the opportunity to reduce volumes of outstanding business where spare capacity was available. Lower production requirements due to COVID19 restrictions meant that businesses reported a sharp moderation in purchasing activity, with buying falling to an extent not seen since April 2020. At the same time, manufacturers utilised existing stocks of pre- and post-production inventories to fulfil incoming orders. However, in some cases, dwindling supply continued to hamper purchases of certain key inputs. Despite the reduction in demand, input prices rose for the thirteenth month running in June. The pace of input cost inflation softened from May, yet remained sharp overall. Higher raw material costs amid shortages and delivery delays contributed to increased input prices. Firms sought to partially pass higher cost burdens on to clients, as output prices rose moderately. Moreover, manufacturers signalled a pessimistic outlook regarding the year-ahead outlook for output for only the fourth time in the survey's history, amid concerns about the duration of the pandemic.

Outlook. The Malaysian manufacturing sector lost considerable momentum at the end of the second quarter of 2021, as COVID-19 infections led to the reintroduction of stricter containment measures. The IHS Markit Malaysia Manufacturing PMI fell to 39.9 in June 2021 from 51.3 a month earlier as Malaysia’s COVID-19 driven movement restriction policies resulted in output and incoming orders moderating to the greatest extent since the worst of the initial outbreak of the pandemic in April 2020. IHS Markit said that looking at the historical relationship between official statistics and the PMI, the latest reading is representative of a renewed downturn in Malaysia’s industrial production and GDP, following a gradual recovery from earlier waves of infections. This highlights that the pandemic remains the greatest downside risk to the Malaysian economy. Looking ahead, uncertainty remains high. Some short-term disruptions in manufacturing activities, hence shipments, are expected following current Full Movement Control Order (FMCO) which came into effect on 1 June 2021 and remain in place until the three thresholds for exit from lockdown are met i.e., the number of new daily Covid-19 cases dip below 4,000, the public health system returns to moderate levels, and 10% of the population has been fully vaccinated. There is a risk that manufacturing production and export momentum may moderate in the coming months due to the global COVID situation and tightening of restriction measures both globally and domestically, which could pose some downside risk to Malaysia’s growth trajectory.

Global manufacturing remained in a strong growth phase in June

Global manufacturing remained in a strong growth phase in June. The J.P. Morgan Global Manufacturing PMI dipped slightly to 55.5 in June, down from May's 11-year high of 56.0. The PMI has signalled expansion in each of the past 12 months. Manufacturing production rose again in June, albeit at the slowest pace for four months. Output growth was supported by solid intakes of new work, including improved international trade flows. However, stretched global supply chains constrained output growth, leading to a further marked accumulation of backlogs of work at factories. Average vendor lead times lengthened to the greatest extent in the near 24-year survey history during June. Companies raised their level of input purchasing and built-up inventories to try and guard against further supply-chain disruptions. However, with demand outstripping supply, cost inflationary pressures continued to build. Average input prices rose to one of the greatest extents in the survey history. The passthrough of higher costs also led to a further marked increase in factory gate selling prices. The three sub-sectors covered by the survey (consumer, intermediate and investment goods) all registered PMI readings above the neutral 50.0 mark in June. However, rates of expansion also eased in all three. The strongest growth was at investment goods producers, followed by intermediate goods and then consumer goods. The outlook remained positive, with business optimism at robust levels.

Source: BIMB Securities Research - 2 Jul 2021