• Pressures from rising costs were still present

• Malaysia PMI declined for the third month running

• China's manufacturing sector improved for the second consecutive month

OVERVIEW

Higher input costs and waning demand contributed to further decline in ASEAN Manufacturing Purchasing Managers' Index (PMI) in September. After consistently improving each month since October 2021, the data for September showed a decline in the state of the ASEAN manufacturing sector. As the reading fell from 51.0 in August to 49.6 in September, ASEAN entered contraction area for the first time in 25 months. This can be attributed to a recent decline in new orders, with production growing at its slowest rate in two years. Additionally, manufacturers reduced their workforce, following a marginal increase in August. With the exception of the Philippines, however, there was practically a general fall for ASEAN this month. After recording in its third month of a downturn, Malaysia's performance remained dull as output was still constrained by declining demand, reduced employment, rising prices, and increasing input costs. Particularly, the headline index of 46.8 signaled the most rapid plunge since the beginning of 2023.

As previously stated, it was a not particularly optimistic September Manufacturing PMI form for ASEAN (September: 49.6; August: 51.0) - indicated in a less-thanoptimistic figures by Indonesia (September: 52.3; August: 53.9), Thailand (September: 47.8; August: 48.9), Malaysia (September: 46.8; August: 47.8), Vietnam (September: 49.7; August: 50.5), Singapore (September: 47.3; August: 49.9). However, the region's performance was backed by the Philippines (September: 50.6; August: 49.7).

Elsewhere, the Caixin China General Manufacturing PMI recorded its second straight month of expansion but moderated to 50.6 in September (Aug: 51.0). On the other hand, the official NBS manufacturing PMI rose to 50.2 in September, up from 49.7 in August. The latest PMI data for China suggest that, after five consecutive months of contraction, manufacturing conditions in China are now shifting into the expansion range. While the PMI showed only a modest rate of improvement, it still remained slightly above the average reading for the year 2023 thus far. This improvement can be attributed to Chinese manufacturers, who indicated two consecutive month of increases in output during September, and the rate of growth reached a four-month high. Manufacturers kept a positive outlook, with the indicator reflecting their forecasts for future output maintaining over 50. However, this measure dropped to its lowest level since September of last year, primarily due to concerns about the global economic outlook in the upcoming year.

ANALYSIS: MALAYSIA SEPTEMBER MANUFACTURING PMI

A difficult period for Malaysian manufacturers persisted at the end of the third quarter. Malaysia's manufacturing PMI experienced further decline in September (Sep: 46.8; Aug: 47.8) as a result of reduced demand, decreasing employment, rising prices and higher input costs. Both output and new orders saw a more significant moderation than in August, and new export orders experienced the third-most substantial decline in the history of the series. Adversely, employment levels continued to deteriorate for the fifth consecutive month, and purchasing activity softened to the greatest extent since September 2021. The current slowdown appears likely to persist in the coming months. Data on outstanding business revealed one of the most significant declines in backlogs in the history of the series, primarily due to a sustained shortage of new orders. As a response to this weakness, businesses are becoming more cautious in their expenditures, scaling back on input purchases, reducing stock holdings, and trimming employment levels.

OUTLOOK

We are cautious on the near-term outlook as the performance of the manufacturing sector remained subdued. Challenges stemming from the global economy and the ongoing interest rate cycles in many ASEAN economies are causing concerns about the sustainability of current demand trends. The less-thanencouraging performance of ASEAN currencies could also have a negative impact, especially with the anticipated increase in input costs and subsequently higher gate prices, which could act as a restraint to demand. Additionally, global inflationary pressures are a concern, as they have the potential to dampen demand. Overall, the recovery outlook remains challenging with manufacturers staying under pressure as reflected in the underperformance in the PMIs. If contraction persists, it could have an impact on gross domestic product (GDP) growth of ASEAN countries including Malaysia.

Source: BIMB Securities Research - 3 Oct 2023