• Malaysia PMI remained constant at 47.9.

• Inflationary pressures persist.

• China's manufacturing sector accelerated.

OVERVIEW

Recent data indicates continued subdued patterns within the Malaysian manufacturing sector as of the close of 2023. Nonetheless, the data still align with slight growth according to the survey: employment sees its first increase since April and input price inflation drops to a three-month low. The ASEAN manufacturing sector returns to contraction in December. That said, most ASEAN nations reported moderate manufacturing conditions; Malaysia (Dec: 47.9; Nov: 47.9), Thailand (Dec:45.1; Nov:47.6) and Vietnam (Dec: 48.9; Nov:47.3). Still, the region's performance was bolstered by the Indonesia (Dec: 52.2; Nov: 51.7), Philippines (Dec:51.5; Nov:52.7) and Singapore (Dec: 52.0; Nov: 51.7).

Indonesia's manufacturing industry ended the last quarter positively, experiencing solid growth in new orders and output. This supported further economic activity by strengthening purchasing and maintaining increased employment in goods production. The Philippines manufacturing sector closed the year with yet another further gains. Output and new orders showed continued growth, albeit at a more moderate pace. Meanwhile, Thailand's manufacturing sector worsened in December 2023 as new orders continued to decline, resulting in reduced production and less use of resources and labor. Thai manufacturers are concerned about a slight increase in the rate of cost inflation, although below the average, as they already grappling with declining demand conditions. Besides, December 2023 mirrored much of the year in Vietnamese manufacturing, with subdued demand limiting production. Indications point to recent price hikes discouraging customers and playing a role in the latest drop in new orders. Overall, the ASEAN manufacturing sector concluded the year on subdued note. The primary cause of the decline was the worsening downturn in new orders, pointing to overall softer demand conditions. Inflationary pressures persist, leading to increased selling prices across most countries.

Meanwhile, December brought mixed signals from China’s manufacturing sector, as indicated by two key indices: Caixin PMI and official NBS PMI. Caixin PMI Manufacturing slightly increased from 50.7 to 50.8, suggesting a marginal yet steady expansion in the manufacturing sector. Notably, Caixin highlighted that both output and new orders are rising at faster rates, indicating increased production and demand within the industry. Yet, there was a decrease in new export business, marking the slowest rate seen in six months. Staffing levels dropped for the fourth month in a row, signaling a cautious stance on hiring, while cost pressures eased. However, the same period saw a dip in official PMI Manufacturing declined for the third month in a row, fell from 49.4 to 49.0. This decline suggests contraction in the sector, contrasting with optimism reflected in Caixin PMI data. The difference between these two indices can be attributed to their varied focus groups; Caixin PMI typically surveys small and medium-sized enterprises, while NBS PMI is more reflective of larger, state-owned companies.

ANALYSIS: MALAYSIA DECEMBER MANUFACTURING PMI

The Malaysian manufacturing activity remained lackluster at the close of 2023. Signs indicate muted demand in the coming months due to sustained production and new business moderation. Even so, firms chose to hire additional staff in December for the first time in eight months, albeit only to a small extent. Simultaneously, input price inflation decreased for the first time in three months reaching its lowest level since September. Malaysia's PMI remained unchanged at 47.9 in December (Nov: 47.9), signaling ongoing challenging business conditions for manufacturing firms. Also, international demand conditions softened, as new export orders declined for the eight consecutive month, although at the slowest pace since May. Manufactures continued to reduced production for the 17th consecutive month due to subdued customer demand. However, the slowdown was the least pronounced since August.

The Malaysian manufacturing sector witnessed a reduction in the rate of input cost inflation, marking the first instance in three months. The most recent rise was substantial but marked the slowest growth since September and fell below the long-term series average. This occurrence coincided with Malaysia's Producer Price Index (PPI) for November, which dropped even further to -1.5%. Still, firms kept reporting elevated raw material prices, primarily attributed to currency weakness. Hence, prices were increased additionally, even though the inflation rate has remained relatively low and consistent over the last four months.

OUTLOOK

After protracted weakness in manufacturing output and exports through most of 2023, there are early signs of improving momentum as the year draws to a close, helped by strong production and improving electronics exports. November 2023 saw continued single-digit exports decline (Nov: -5.9% YoY; Oct: -4.5%). The second consecutive single-digit decline in exports in November 2023, after double-digit falls in 2023, reflected the same trend in the exports of manufacturing (Nov: -6.7%; Oct: -3.6%). However, given the muted situation of the manufacturing sector, we remain cautious on the outlook. Overall, we foresee the momentum for external trade recovery will continue, reinforced by signs of a further recovery in the global tech cycle and a projected soft landing in the advance economies while tapering inflationary pressures along major economies implies that monetary policy tightening among major central banks is at the tail-end. The manufacturing performance more or less reflected the same trends in IPI and exports, and therefore we foresee the manufacturing sector to improve going forward in line with sustained growth in domestic spending and recovery in external demand.

Source: BIMB Securities Research - 3 Jan 2024