• Manufacturing sales value decreased by 4.0% YoY

• Sustained growth in the sales value of both export and domestic oriented

• Manufacturing sector employment increased by 2.1% YoY

• Productivity declined 5.9% YoY in June

• Subdued demand a drag to the manufacturing sector

The sales value of the manufacturing sector stood at RM147.4bn, slipped by 4.0% YoY in June after recording a positive growth of 3.3% in the preceding month. The decline was primarily influenced by the food, beverages & tobacco sub-sector, which decreased by 14.6% (May: -10.9%), marking three consecutive months of double-digit declines. In addition, the deterioration was also attributable to the contraction in the petroleum, chemical, rubber & plastic (Jun: -12.4%; May: +2.0%); and wood, furniture, paper products & printing (Jun: -1.1%; May: +7.9%) subsectors.

In comparison with the previous month, the sales value rose by 0.4% MoM while seasonally adjusted sales value decreased 2.2%.

The sales value of export-oriented industries which accounted for 73.0% of total sales dropped by 7.4% YoY in June after registering a marginal increase of 0.1% in May 2023. The decrease was mainly due to the manufacture of vegetable & animal oils & fats (-27.4%); manufacture of coke & refined petroleum products (-18.6%); and manufacture of rubber products (-13.2%). On the other hand, domestic-oriented industries continued to cushion the decline in sales value by sustaining a positive trajectory since September 2021, expanding by 6.8% YoY in June (May: 12.5%). The steady momentum was predominantly backed by the strong growth in sales value of the manufacture of motor vehicles, trailers & semi-trailers by 10.5%. Meanwhile, manufacture of food processing products; and manufacture of fabricated metal products, except machinery & equipment industries, sustained their positive momentum by registering 7.5% and 7.4%, respectively. Month-onmonth basis, export-oriented industries increased by 2.4% while domestic-oriented industries experienced a decrease of 4.6%.

Hiring in manufacturing sector slowed marginally. The manufacturing sector engaged 2.35mn persons in June, posted a 2.1% YoY as compared to the 2.30mn persons recorded a year ago. The rise was mainly supported by the electrical & electronics products (Jun: 3.4%; May: 4.2%); wood, furniture, paper products & printing (Jun: 1.8%; May: 2.5%); and transport equipment & other manufactures (Jun: 1.6%; May: 2.4%) sub-sectors. In comparison to the preceding month, the number of employees in this sector decreased marginally by 0.4%,

In line with the increase in the number of employees, the salaries & wages paid in the manufacturing sector increased by 3.0% YoY, which amounted to RM8.0bn in June. On a month-on-month comparison, the salaries & wages reduced by 0.6% from RM8.1bn recorded in May. In addition, the average monthly salaries & wages per employee posted an increase of 0.9% with a value of RM3,432. Similarly, average salaries & wages paid per employee contracted by 0.2% as compared to the preceding month.

Meanwhile, the sales value per employee or productivity in June declined by 5.9% YoY to RM62,853 as compared to RM66,801 in the same month of the previous year. Meanwhile, the average sales value per employee increased 0.9% as compared to May 2023.

Manufacturing sales declined in 2Q23. In the second quarter of 2023, the sales value of the manufacturing sector posted the first decrease since the second quarter of 2020 (-16.5%), registering a negative 1.0% YoY as compared to the same quarter of the previous year. The decrease was attributed to the food, beverages & tobacco sub-sector (-12.7%); as well as the petroleum, chemical, rubber & plastics sub-sector (-4.8%). At the same time, the number of employees and salaries & wages during the quarter grew modestly by 2.1% (2Q23: 2.8%) and 3.6% (1Q23: 4.3%) respectively.

Manufacturing sector sales value moderated in 1H23. Overall performance for January to June 2023, the sales value of the manufacturing sector rose by 3.5% YoY, to register RM888.6bn as against the same period of the preceding year. Meanwhile, the number of employees added by 2.1% to record a total of 2.35mn persons with salaries & wages grew by 4.0% to RM48.7bn. Besides that, sales value per employee registered a growth of 1.4%, amounting to RM378,855 for the first half of 2023.

Outlook

Malaysia's manufacturing sales returned to negative growth, declined 4.0% YoY. This aligns with the contraction seen in Malaysia's Industrial Production Index (IPI) which declined 2.2% YoY, contrasting a positive growth 4.8% registered in May. The manufacturing sector output decreased by 1.6% YoY in June after registering a growth of 5.1% in May.

Manufacturing Purchasing Managers’ Index (PMI) remained subdued in July (Jul: 47.8; Jun: 47.7), indicating a weak start for the 3Q23. While we are heartened by the slight improvement seen in the manufacturing PMI, it remained in contraction level for the eleventh consecutive month or since September 2022 and the sub-50 print still correlates with our view that Malaysia continues to experience headwinds in the manufacturing sector, as many of the key sub-indices within the PMI remained in contraction territory. The weakness in the manufacturing industry is primarily attributed to weak global demand conditions. The weaker PMI reading in July is in line with our expectation that the manufacturing condition will remain weak in the 3Q23 and would potentially spill over towards the end of the year due to the global economic slowdown and the waning lower base effect recorded last year. Meanwhile, Malaysia’s exports remained sluggish in Jun, contracting for the fourth straight month and by a double-digit pace for the second time this year at 14.1% YoY (May: -0.9%). In 2Q23, exports shrank for the first time in 11 quarters by 11.1% YoY (1Q23: +3.0%). Overseas shipments of manufactured goods fell by 9.5% YoY (May: +1.7%) despite the improvement in exports of E&E products (Jun: +3.2%, May: +1.5%). The export contraction trend will likely persist for the greater part of 2H23 as a result of the unfavourable base effects, subdued global demand and easing global commodity prices. Global demand has yet to show signs of rebounding as the pent-up demand in consumer spending continues to normalize post pandemic amid elevated living costs. Demand from the advanced economies particularly the US and Europe slowed due to tighter monetary conditions, while China’s reopening has yet to provide desired spillover effects to regional peers, including Malaysia. All these is expected to weigh on the 3Q23 GDP growth outlook.

These economic indicators suggest a mixed picture for Malaysia's manufacturing sector. The latest manufacturing data still correlates with our view that Malaysia is experiencing headwinds in the manufacturing sector. While 2Q 2023 GDP growth is likely to moderate and be slightly lower than the level seen in 1Q 2023, rather than fall significantly, we think some measures of weakness in manufacturing will linger. We may yet see a few more months of sub-50 PMI prints for PMIs before more positive prints emerge in later part of 2H 2023. Downside risks remain given the uncertain global economic outlook and the potential for exports to weaken. We still expect growth to remain moderate in the coming months and the momentum in both manufacturing production and manufacturing sales value is expected to stay soft, amid its cautious outlook on the manufacturing sector and trade performance.

Source: BIMB Securities Research - 9 Aug 2023