• Manufacturing sales value decreased by 3.3% YoY

• Performance of domestic-oriented industries remained strong

• Manufacturing sector employment increased by 2.0% YoY

• Productivity declined 5.2% YoY in August

• Subdued global demand to extend the slowdown in manufacturing activity

The sales value of the manufacturing sector fell for a third consecutive month registering a decline of 3.3% YoY to record RM152.3bn in August after recording - 3.0% YoY in the preceding month. Reduced sales were primarily influenced by the petroleum chemical, rubber & plastic sub-sector, which decreased by 12.1% (Jul: - 15.3%; Jun: -12.4%)., marking three consecutive months of double-digit declines. In addition, the deterioration was also attributable to the contraction of food, beverages & tobacco (Aug: -6.6%; Jul: -7.8%); and wood, furniture, paper products & printing (Aug: -0.1%; Jul: -0.6%) sub-sectors.

In comparison with the previous month, the sales value rebounded to 5.8% as compared to the -2.4% recorded in July while seasonally adjusted sales value increased 1.3%.

The sales value of export-oriented industries which accounted for 72.7% of total sales decreased by 6.7% YoY in August (Jul: -7.0%), mainly attributed to the decrease in the manufacture of coke & refined petroleum products (Aug: -19.7%; Jul: -25.6%); manufacture of vegetable & animal oils & fats (Aug: -15.1%; Jul: -18.5%) and manufacture of rubber products (Aug: -8.8%; Jul: -10.8%). On the other hand, domestic-oriented industries continued to mitigate the decline in sales value, with a growth of 7.2% YoY in August (Jul: 9.1%). The steady momentum was predominantly backed by the strong increase in sales value of the manufacture of motor vehicles, trailers & semi-trailers, which surged by 15.0%, as well as manufacture of fabricated metal products, except machinery & equipment at 10.4%. In addition, manufacture of other non-metallic mineral products and manufacture of food processing products increased by 7.1% and 6.0% respectively. On month-on-month basis, export-oriented and domestic industries increased by 6.7% and 3.5% respectively.

Hiring in manufacturing sector increased marginally. The manufacturing sector engaged 2.36mn persons in August, up 2.0% from 2.31mn persons engaged in the same period last year. As compared to the preceding month, the number of employees in this sector grew by 0.6%. In line with the increase in employment, the salaries and wages paid in the manufacturing sector grew 3.0% YoY, amounting to RM8.0bn in August. On a month-onmonth comparison, the salaries and wages increased 0.9% from RM7.9bn recorded in July. The sales value per employee or productivity in August declined by 5.2% YoY to RM64,660 as compared to RM68,173 in the same month of the previous year. Meanwhile, the average sales value per employee expanded by 5.1% as compared to July 2023.

Slower sales value in 8M23. For the first eight months of 2023, the sales value of the manufacturing sector stood at RM1.18tn, up 1.7% YoY. During this period, the number of employees increased by 2.0% while salaries & wages grew by 3.7%. Meanwhile, the sales value per employee declined slightly by 0.2%.

Outlook

Sales value for manufacturing sector recorded the third consecutive month of contraction with growth in Malaysia's manufacturing sales declined 3.3% YoY in September. This aligns with the contraction seen in Malaysia's Industrial Production Index (IPI) which declined slightly to -0.3% in August, (Jul: +0.7%) amid manufacturing component remained in contraction for third month as the growth for manufacturing segment edged down -0.6% (Jul: -0.2%).

Manufacturing Purchasing Managers’ Index (PMI) fell further in September (46.8; Aug: 47.8), as a result of reduced demand, decreasing employment, rising prices and higher input costs. The index remained in contraction level for the thirteen-straight month, with manufacturing conditions eased the most since January and thus reflecting no sign of demand revival. The extended slowdown in the manufacturing industry is highly attributed to a weaker demand in tandem with the global economic slowdown narrative. Meanwhile, exports registered the 6th straight month of decline, contracting sharper at -18.6% YoY in August (Jul: -13.0%) with exports of manufactured goods fell for a third succeeding month by 17.7% YoY (Jul: -9.7%). The lower manufacturing PMI reading and exports reflects a persistent weakness in the manufacturing conditions largely due to subdued demand from the external sector and this suggests that manufacturing conditions continue to be challenging, with slower momentum in the sector.

While we are heartened by the sales value rebounded to 5.8 % MoM as compared to the negative 2.4% recorded in July and the IPI which increased by 2.8% MoM, contrasting the negative growth of 1.8% recorded in July, headwinds in the manufacturing sector remains. These economic indicators suggest a mixed picture for Malaysia's manufacturing sector. We remain hesitant to call for a manufacturing recovery solely on the monthly positive print in the soft data and would require further improvements and sustained expansionary readings for greater certainty on the progress of manufacturing recovery. The latest manufacturing data still correlates with our view that Malaysia is experiencing headwinds in the manufacturing sector. Hence, the overall outlook for the manufacturing sector appears fragile given the weak external demand, which could persist for the rest of 2023, exacerbated by tight financial conditions stemming from an elevated interest rate environment.

The ongoing contraction in the manufacturing PMI and significant declines in manufacturing sales and exports are causes for concern and reaffirms that the electronics downcycle and more broadly, the trade downcycle has yet to find a bottom. With external demand likely to weaken further, we expect the weakness in manufacturing activity to persist for the rest of the year with multiple indicators pointing towards challenges in both domestic and international markets. The manufacturing sector is likely to remain lacklustre given the weak external demand. Therefore, the sector may continue to face uncertainty and challenges in the near future 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 and any signs of recovery will only likely to emerge earliest in 1Q24.

Source: BIMB Securities Research - 13 Oct 2023