• ASEAN Manufacturing PMI Index is set to rebound further

• Supply chain disruption is expected to improve, capping input cost inflation

• Signs of recovery in China’s Manufacturing PMI post economic reopening

ASEAN Manufacturing Purchasing Managers’ Index (PMI) recovered slightly in  February which could be a precursor of convincing turnaround in the near term.  This is in-sync with global index which staged a recovery as well or to 50.0 in  February (January: 49.1), an encouraging improvement following the tough  previous months. That said, it was a mixed form for ASEAN this month with an  alarming deterioration for Singapore amid its volatile form since the last few  months. ASEAN Manufacturing PMI printed at above the neutral level in  February (51.5; January: 51.0) which could have been much higher if not for the  surprise pullback by Indonesia, Philippines and Singapore. Malaysia produced a  steady turnaround though it remained below the expansion level, sixth straight  month below the neutral level. That said, Malaysia’s Manufacturing PMI recovered further to 48.4 in February versus 46.5 in January, which could tick  even higher soon given China’s full economic re-opening. 

The drag to ASEAN previously, Myanmar, also recovered (February: 51.1;  January: 49.6; December 2022: 42.1) thanks to the recovery in production and  new orders.

As mentioned, it was a mixed form for ASEAN’s February Manufacturing PMI  (February: 51.5; January: 51.0; December 2022: 50.3) – lifted by a turnaround  by Malaysia (February: 48.4; January: 46.5), Thailand (February: 54.8; January:  54.5) and Vietnam (February: 51.2; January: 47.4) though dragged by Indonesia  (February: 51.2; January: 51.3), Philippines (February: 52.7; January: 53.5) and  Singapore (February: 49.7; January: 51.9).

China’s Manufacturing PMI improved further in February (51.6; January: 49.2; December 2022: 49.0) thanks to a revival in manufacturing activity post  economic re-opening. Global Manufacturing PMI also rebounded in February  (February: 50.0; January: 49.1; December 2022: 48.7) thanks among others to  the easing in global supply chain constraint and China economic re-openings.  We are bullish on ASEAN near-term prospect in line with China’s full economic  reopening which took place in January. A pick-up in China’s economic activity will be a precursor for global supply chain to improve, bringing down input cost,  capping inflationary pressure, which has been a pain for producers. This will also  push shipping rates lower and shortages for containers to ease. Above all, a  minimal disruption from China is a preamble for global demand to surge and  hence, ASEAN Manufacturing PMI numbers.

ASEAN’s Manufacturing PMI is also set to be lifted by improving COVID-19  conditions (note: despite the emergence of VoC; XBB variant) and full economic reopening around the region. This will also be pushed by the easing in global  inflationary pressure (especially in 2H23), normalization in global supply chain  condition though it could be dampened by prolonged geopolitical tension in  Europe. Labour shortage will also be less of an issue thanks to the authorities  that have removed administrative impediments and hence, the return of  immigrant workers in Malaysia and around the region.

ANALYSIS: MALAYSIA FEBRUARY MANUFACTURING PMI

Malaysia’s manufacturing output rebounded in February (Manufacturing PMI February: 48.4; January: 46.5; December 2022: 47.8) thanks to improvement in  output and new orders vis-à-vis January. This was also helped by the shortening  in suppliers’ delivery time on the back of muted inflationary pressure, a timely  improvement following the tough previous months. New orders remained uninspiring however especially with subdued international demand. Firms chose  to keep employment steady particularly with a projected increase in demand in  the near term. Efforts to expand workforce were dampened by voluntary  resignation and therefore, a stable work force. The slow pace of output  underpinned firms’ efforts to clear backlogs, the most since July 2017. The rate  of input cost inflation ticked up to a 3-month high in February though modest  and softer compared to 2022 average. Positively, firms are more upbeat on the  near-term prospects amid both domestic and external demand conditions that  are set to improve as the global economy recovers. This was reflected in the  level of confidence which held broadly steady in February

OUTLOOK

Manufacturing operating conditions are improving thanks to the easing in  external headwinds particularly from China. Recall that China re-opened the  economy by surprise since January 2023. The development from China is  particularly significant as its full economic reopening will trigger a spillover effect  including an improvement in global supply chain condition, easing in input cost,  demand recovery, a drop in shipping rates – suggesting a marked improvement  in operating conditions in the near term. Outlook will also be pushed by rapid  global network transition towards 5G and therefore, demand for smartphones,  wearables and tablets. This will also be driven by a rising take up rate for EV cars  and hence, demand for chips and electronics. Though prospects are improving  but several challenges remain including the on-going conflict between Russia-Ukraine. This will also be added by aggressive advanced economies (AEs)  interest rate tightening which may trigger rapid capital outflow, existential risks  for emerging economic (EMs) currencies. All in, we expect manufacturing  operating condition to improve thanks particularly to China and hence, the  Manufacturing PMI numbers.

Source: BIMB Securities Research - 2 Mar 2023