• Most ASEAN countries was in contraction except for Indonesia

• Input cost inflation rose moderately

• China's manufacturing activity experienced an unexpected contraction in October.

At the beginning of the final quarter of 2023, manufacturers in Malaysia faced another tough business environment as demand conditions continued to deteriorate. In October, majority of ASEAN countries saw contraction, with the exception of Indonesia. Malaysia's PMI remained constant, but a decline for Vietnam and Thailand. Across the region, most countries experiencing challenges related to cost inflation, declining output, and reduced new orders. October Manufacturing PMI data for ASEAN was not very promising, evidenced by unfavourable numbers by Thailand (Oct: 47.5; Sep: 47.8), Vietnam (Oct: 49.6; Sep: 49.7), Malaysia (Oct: 46.8; Sep: 46.8), Indonesia (Oct: 51.5; Sep: 52.3).

Indonesia was the sole country that achieved growth in October compared to the previous month, albeit at a slower pace. Vietnamese manufacturing sector experienced a slight decline due to companies reducing their production, even though there were modest improvements in new orders. Simultaneously, Thailand’s manufacturing sector contracted at an accelerated pace. This was primarily due to a decrease in new orders, both domestically and from overseas, at the beginning of the fourth quarter. Meanwhile, the latest reading of Indonesia's PMI indicates that conditions in the manufacturing sector have continued to improve for the twenty-sixth consecutive month. However, this improvement occurred at the slowest pace since May.

The Caixin manufacturing survey in China underscored the message that the momentum of growth is weakening, despite the proactive policy support in place. October saw an unexpected slump in China's manufacturing activity (Oct: 49.5; Sep: 50.6). The data aligned with the official reading from the National Bureau of Statistics (NBS), indicating that factory activity had regressed into contraction at a level of 49.5. Firms experienced a new decline in production due to slower growth in their overall sales. This decline in sales was primarily influenced by weakened foreign demand. The sector's overall employment dropped as well, and more quickly than it did in September. Manufacturers indicated the most rapid increase in average input prices since January. This led to a further increase in selling prices as they sought to offset the rising costs.

Overall, the October PMI for Asia generally dropped back further inside contractionary territory. The outlook for manufacturing in the region remains bleak in the near term as inventory levels and weaker foreign demand are set to curtail production

ANALYSIS: MALAYSIA OCTOBER MANUFACTURING PMI

The business environment for Malaysian manufacturers remained demanding as they entered the final quarter of 2023, primarily due to ongoing weakening demand conditions. It was observed that there was a deceleration in new orders, and production was reduced. Additionally, employment dropped, but businesses were still able to clear their backlogs of work to the greatest degree since the survey's inception in July 2012. Meanwhile, the depreciation of the currency and rising raw material prices led to increased input costs for businesses. Nevertheless, the inflation rate stayed relatively subdued. Malaysia's PMI remained steady (Oct: 46.8; Sep: 46.8), indicating a continued relaxation of business conditions for the fourteenth consecutive month.

Input cost inflation increased steadily in October, hitting its highest level since November of last year. Nonetheless, the recent increase was still milder than the average for the series, and it was significantly weaker than what has been observed over most of the past three years. The inflation observed was the result of both currency depreciation and increased costs for raw materials in the global markets. Output charges increased for the third consecutive month as companies transferred higher input costs to their customers, but the inflation rate remained relatively modest. Concurrently, this mirrored with Malaysia’s Producer Price Index (PPI) in October where it rebounded to 0.2% after a seven-month dip. This growth mainly attributed to the base effect and the higher prices of primary commodities.

OUTLOOK

Given that the manufacturing activity has remained muted, we are cautious about the near-term outlook. Expectations that the demand conditions will pick up over the next year boosted confidence in the outlook for production. The outlook for manufacturing activity in the near term is not encouraging however. A key drag will come from a weak global demand, especially with the new orders sub-index has been in contraction for most economies. Furthermore, there are concerns arising from the ongoing conflict in the Middle East and uncertainty persists regarding the global economic outlook. If the situation persists, it has the potential to further negatively impact the manufacturing sector. The weakening of the Malaysian Ringgit and the rising input prices have already contributed to the input cost inflation and it could further deteriorate. Manufacturers are likely to transfer their increased costs to consumers, which could result in higher output prices and potentially dampen consumer demand.

Source: BIMB Securities Research - 2 Nov 2023