• Most ASEAN Nations Registered Growth
   
• Malaysia PMI Rose to 49.5
   
• Inflationary pressures accelerated

• China's factories send mixed signals, prompting Beijing for more action

OVERVIEW

Midway through the first quarter, Malaysian manufacturers persisted in their journey toward recovery. Most ASEAN regions experienced growth, with PMIs in Indonesia (Feb: 52.7; Jan: 52.9), Philippines (Feb:51.0; Jan:50.9) and the Vietnam (Feb: 50.4; Jan: 50.3) indicating expansion in activity. However, Malaysian (Feb: 49.5; Jan: 49.0), and Thai (Feb: 45.3; Jan: 46.7) PMIs both revealed ongoing declines in activity.

Indonesia's February PMI indicated increased production, driven by rising new work, prompting manufacturers to boost purchasing, inventories, and workforce. However, companies faced the sharpest input cost rise since late 2022, and output price inflation reached a one-year high. Filipino manufacturing witnessed increased momentum in new orders, leading to a fresh rise in employment and sustained growth in purchasing activity. Yet, the sector was hindered by the severity of material shortages. Vietnamese manufacturing saw marginal growth with increased output and new orders, resulting in higher employment and a oneyear high in business confidence. Despite shipping delays and elevated transportation costs linked to rising oil prices, input costs increased notably, though to the least extent since September. Thailand's manufacturing sector deteriorated in January, marked by a significant decline in new orders, potential downturn signals, and increased margin pressures due to challenges in passing rising input costs amid falling demand.

China's economic signals were mixed, as the government's official PMI indicated a continued decline in factory activity, contrasting with a slight pickup observed in the private-sector Caixin PMI. The Caixin China manufacturing PMI reported four consecutive months of growth (Feb: 50.9; Jan: 50.8), marking the first such trend since the second half of 2021 and signaling an overall economic recovery. Sustained supply and demand expansion boosted purchases and raw material stocks, fostering optimism. However, job market contraction and depressed prices signaled persistent deflationary pressures. Meanwhile, National Bureau of Statistics (NBS) reported that China's factory activity contracted for 5th month (Feb: 49.1; Jan: 49.2), increasing pressure on Beijing for additional stimulus measures. The decline is attributed to disruptions related to the Lunar New Year holiday, as an increase in employees returning home affected firms' production and operations.

Overall, the ASEAN manufacturing sector showed continued improvement in business conditions. Some ASEAN nations showed tentative signs of demand improvements, while others still experienced tepid demand. Inflationary pressures in some ASEAN countries were linked to increased raw material costs and a weak exchange rate.

ANALYSIS: MALAYSIA FEBRUARY MANUFACTURING PMI

In February, Malaysia's manufacturing sector approached stabilisation. Latest data indicates a turning point in demand conditions in February, with slight moderations in output, total new orders, and exports, as pockets of demand build up in the manufacturing sector. Employment and backlogs broadly stabilized, while there were also signals of stability in purchasing activity and average lead times. Malaysia's PMI increased to 49.5 in February (Jan: 49.0), indicating a slight deterioration in business conditions. This was the softest decline since the sequence began in September 2022. The easing of output in Malaysia was largely attributed to weak demand conditions, though some firms noted signs of recovery in specific areas, consistent with softer moderations in total new orders and new export business. Still, some manufacturers chose to hire additional full-time staff as pockets of demand emerged. Concurrently, increased raw material prices and currency weakness raised firms' input costs, accelerating inflation. However, selling prices were raised only slightly in response.

OUTLOOK

Looking forward, Malaysian manufacturers foresee an increase in demand, and despite the mild expansion in PMI, they anticipate a gradual recovery in production by 2024. Recent data indicates slight delivery delays from port congestion and Red Sea disruptions, while rising regional geopolitical tensions may amplify global supply chain disruptions. Despite a cautious outlook, a broader recovery is anticipated by mid-2024. This is bolstered by projected improvements in the 2024 unemployment rate and sustained growth in distributive trade sales, driven by increased tourist arrivals and spending. January's trade data showed a strong start with exports up 8.7% YoY and imports solid at 18.8% YoY, supporting our expectation of improved export growth in 2024 despite potential monthly fluctuations. The expected manufacturing sector recovery, potentially led by electronics and electrical (E&E) upcycle in the second half of 2024 (2H24) and China's gradual recovery, augurs well for the domestic growth outlook. Additionally, February saw a resurgence in global manufacturing, with the Global manufacturing PMI remaining in expansion territory, indicating improvement despite ongoing sector challenges.

Source: BIMB Securities Research - 4 Mar 2024