• Malaysian manufacturers reported a near-stagnation of operating conditions in 1Q22

• Global Manufacturing PMI slips to 18-month low as rising headwinds hamper growth

• Ukraine war hits business confidence, drives price pressures to new highs

• ASEAN manufacturing output registered loss of growth momentum

Malaysian manufacturers reported a near-stagnation of operating conditions in 1Q22

Malaysian manufacturers reported a near-stagnation of operating conditions at the end of the first quarter of 2022. The seasonally adjusted S&P Global Malaysia Manufacturing PMI fell from 50.9 in February to 49.6 in March. The latest reading pointed to a slight deterioration in the health of the sector that was the first since September 2021. Survey gauges for both output and new orders signalled further moderations in March, with both gauges showing sharper rates of reduction than in February. Companies reported that high COVID-19 infections and rising raw material prices had weighed on demand and client confidence in domestic and international markets. New export orders were also muted in March, reducing at the quickest rate for six months. Input costs increased further in the latest survey period, reflecting higher prices for a range of raw materials and freight costs. The overall rate of inflation quickened for the first time in three months and was marked overall. Manufacturers sought to partially pass these higher costs to customers by raising output charges. As a result, factory gate inflation reached the highest since April 2021. Both input costs and output prices have now risen consistently for 22 months. Businesses reported that workforce numbers were scaled back for the second successive month, albeit only slightly which further added to capacity pressures. Looking ahead, manufacturers displayed optimism regarding the outlook for output in the coming year. However, the overall degree of sentiment waned to the softest since last October. While coming months should see the headwind from the pandemic continuing to ease, it's clear that many producers are worried that the crosswind from the war will subdue the rebound from the latest COVID-19 wave.

Outlook. Malaysia Manufacturing PMI fell to 49.6 in March 2022 from 50.9 in the prior month, pointing to the first decline since last September. March saw manufacturers once again struggle against the headwinds of high COVID-19 infection rates with both output and new orders moderated for the third month running and at faster rates; while export orders were muted, reducing at the quickest rate for six months amid container shortage and subdued overseas demand. The impact on manufacturing capacity was exacerbated in March by the rising geopolitical uncertainty caused by the invasion of Ukraine. The war has not only added to global supply disruptions and led to a surge in energy and other commodity prices, but has driven a further cooling of global demand. Looking at the historical relationship between the PMI and official statistics, the latest reading signalled that industrial production slowed on average during the first quarter compared to the fourth quarter of last year. Industrial production grew at a moderate growth of +4.3% yoy in January, slower than +5.9% yoy in the previous month whilst exports growth moderated to +16.8% yoy (Jan: +23.9%) but maintained double-digit growth since August 2021. Looking ahead, the direction of the economy will be heavily influenced by the development of the Russia-Ukraine war and US economic reports. The transition to the endemic phase and the reopening of international borders from 1 April 2022 indicate that growth prospects for Malaysia's economy will be better going forward. The expansion in the economy will be boosted by the continued recovery in private consumption as well as the growing external demand. This will further strengthen the expectation of local economic recovery.

Source: BIMB Securities Research - 4 Apr 2022