• Malaysia bucked the regional trend however

• Supply chain disruption and labor shortage remain a bane for Malaysia

• China Manufacturing PMI slips to below the neutral level

OVERVIEW

The Global Manufacturing Purchasing Managers’ Index (PMI) moderated to a 26-month low in August, signaling challenging times ahead as the industry grappled with a slowdown in demand the led a rise in finished stocks and therefore, excess capacities at factories. Only a third of 30 nations which contributed to the data registered increases in production though this was dampened by contractions across key global producers in Euro area, US, Japan and UK. ASEAN bucked the global trend however, lifted by a steady expansion in Singapore, Indonesia, Philippines, Thailand and Vietnam though could have been much higher if not for the slowdown in Malaysia and Myanmar. This is ASEAN’s 11th straight month of expansion which is even more remarkable given that it outperformed the global index. Myanmar remained a drag (August: 46.5), its four successive months of decline which is not surprising given the lingering political turmoil and headwinds from COVID-19. Malaysia’s achievement was also less-than-encouraging following output that pulled back in August, hampered by weakening demand, labour shortage, rising prices and escalating input cost. Having said that, Malaysia’s Manufacturing PMI eased to 50.3 in August (July: 50.6), four straight months of just above the neutral level.

We are cautious on the near-term outlook given supply-chain disruptions which may take time to normalise. This may be added by rising geopolitical tensions given on-going conflict between Russia and Ukraine. Global inflationary pressure is also a concern as that could hurt demand in the near term. China’s zero-COVID-19 policy is also a worry given a longer-than-expected global supply-chain disruptions. All these may cap the full turnaround of manufacturing sector and therefore, our cautious stance in the near term.

As mentioned, the expansion in August Manufacturing PMI is a trend across the region including Singapore (August: 56.8; July: 60.0), Thailand (August: 53.7; July: 52.4), Indonesia (August: 51.7; July: 51.3), Philippines (August: 51.2; July: 50.8) with the exception of Malaysia (August: 50.3; July: 50.6) and Myanmar (August: 46.5; July: 46.5). Singapore led the region for the highest expansion rate again, thanks to global semiconductor upcycle and full economic openings around the world that pushed demand for its products. Note that this is Singapore’s best winning streak, 9th consecutive month of rise, a notable form given its solid expansion that is markedly above ASEAN peers.

China’s Manufacturing PMI slipped to a contraction in August (49.5; July: 50.4) no thanks to strict COVID-19 lockdown policies that weighed on production. We remain cautious on China given the country’s zero-COVID-19 policy which may affect manufacturing production and therefore, the prolong disruption in global supply chains. Global Manufacturing PMI also skidded (August: 50.3; July: 51.1) hampered by challenging global economic condition that soured demand. This was further added by stretched global supply chains disruptions, inflationary pressures and protracted geopolitical tensions.

ASEAN’s Manufacturing PMI is set to be supported by improving COVID-19 conditions, full economic as well as international border re-opening around the region. This could be tempered however by growth slowdown in China (2022F: 3.5%; 2021: 8.1%), global inflationary pressure, persistent supply chain disruptions and prolonged geopolitical tension due to Russia’s transgression into Ukraine. The aggressive interest rate movement in US could also hurt given the risk of currency volatility which may push firms to delay their purchase. Labour shortage is also a worry though this is expected to improve and recover fully in 2023.

ANALYSIS: MALAYSIA AUGUST MANUFACTURING PMI

Malaysia’s manufacturing output moderated in August (Manufacturing PMI August: 50.3; July: 50.6) no thanks to labour shortage, global economic weakness and supply chain disruptions that weighed on operating conditions. This was offset however by a turnaround in incoming orders and an improvement in delay which have been a bane for the sector since the last few months. This was positive for price pressures on the back of input prices that jumped to its slowest since the last 11 months. Incoming orders were supported primarily by the domestic market though a contrast for export demand given lingering global economic weakness. Vendor performance also improved on the back of reduced pressure on supplier which allowed firms to fulfil production requirements. Nonetheless, shortages for key input remained a dampener which contributed to moderation in stocks of purchases and finished items. Positively, input cost which has increased for the 27th straight month, registered a slowdown in expansion rate, weighed down predominantly by raw material and transportation prices notably oil. This is a boon amid firms that partially passed this saving to clients which was reflected through output charges that increased at the softest pace in the last 12 months. Firms also cleared their backlog in anticipation of incoming orders despite having to deal with labour shortage. Firms remained sanguine on the outlook especially when COVID-19 is no longer a threat. This was reflected in the overall level of confidence which rose to a 7-month high.

OUTLOOK

We are cautious on the near-term outlook given the on-going supply chain disruptions and therefore, price increase for manufacturing products. This could also weigh by labor shortage which could take time to resolve. Sentiment could also hurt by growth slowdown in China and the country’s uncompromising COVID-19 policy which could disrupt the global supply chain further. The volatility in ASEAN currencies given sharp interest rate movement in advanced economies (AEs) may also bite given manufacturers aversion on uncertainty. The global inflationary pressure is also a concern as that could dampen demand. The prolonged Russia-Ukraine conflict is also a worry given persistent pressure on global inflation. The challenging global growth outlook is also a dampener as it could douse demand given the uncertainty over employment and wages.

Outlook will nonetheless be supported by the region’s move into COVID-19 endemic stage and better handling of COVID-19 situation. The turnaround in manufacturing sector will also be aided by the authorities’ resolve to keep the disruption of COVID-19 to a minimal. Full economic openings in most regions especially in advanced economies (AEs) and Eurozone will also push demand for manufacturing products. Rapid global transition towards electric car (i.e., EV) and global telecommunication sector transition towards 5G network will also lift the sector. The lag impact of global massive fiscal stimulus spending in 2021 and competitive ASEAN currencies will also underpin its trajectory. The macro risks could overwhelm in the near term however and therefore, our cautious stance for the sector.

Source: BIMB Securities Research - 5 Sept 2022