• All ASEAN members are in expansion territory
   
• Malaysia's PMI surged to 50.2, surpassing the 50.0 neutral mark after 20 months of moderation
   
• Inflationary pressures increased across most ASEAN countries

• China’s Caixin gauge contrasts with weak official PMI

OVERVIEW

Operating conditions in the ASEAN manufacturing sector significantly enhanced. The Headline PMI rose to a 13-month high of 51.7 in May from April's 51.0, indicating a sustained and more robust improvement in sector health. The manufacturing conditions across most ASEAN members improved, with all surpassing the critical 50.0 mark; Indonesia (May: 52.1; Apr: 52.9), Philippines (May: 51.9; Apr: 52.2), Vietnam (May: 50.3; Apr: 50.3), Thai (May: 50.3; Apr: 48.6) and Malaysia (May: 50.2 Apr: 49.0). Malaysia and Thailand expanded after a prolonged contraction period, while other countries eased slightly but remained in expansion territory.

Indonesia's manufacturing sector performed well with strong output and new orders, backed by robust domestic demand. However, global weakness affected exports. Lower growth, declining confidence, and rising costs are concerns leading to cautious hiring by firms. Filipino manufacturing experienced mid-quarter growth in new orders and output, yet job cuts were observed. Input prices decreased while charges rose, reflecting firms' margin protection strategies amid subdued inflation, yet improved demand suggests sustained economic growth, elevating optimism to a nine-month high. Vietnam's manufacturing sector expanded with higher new orders but faces challenges like reduced staffing and inflation-driven output price hikes. Despite this, companies remain optimistic about securing new business. Thai manufacturing improved in May with higher output and employment, offsetting lower new orders. Notwithstanding this, optimism for the 12-month outlook remains high, with minimal inflationary pressures.

The China's Caixin manufacturing PMI revealed that factory activity, especially among smaller firms in the private sector, grew at the fastest pace in about two years in May (May: 51.7; Apr: 51.4), driven by production gains and increased new orders. The manufacturing sector improved with supply, demand, and exports growing. Logistics were efficient, but low prices and cautious hiring posed challenges. On the flip side, the National Bureau of Statistics (NBS) reported a surprising contraction in manufacturing PMI for May (May: 49.5; Apr: 50.4). It recorded the first factory activity contraction since February, with both new orders and foreign sales declining after two months of growth. Employment remained weak, alongside the first drop in buying levels in three months. China's economy is stable and recovering, with strong industrial production and sustained manufacturing expansion. Challenges like employment pressure and weak demand persist due to longstanding expectations, requiring strengthened policies for stabilization and growth.

Overall, most ASEAN nations exhibited near-stabilisation in demand. Inflation pressures have increased in most ASEAN nations due to high input costs driven by rising raw material prices, influenced by unfavorable exchange rates and oil prices.

ANALYSIS: MALAYSIA MAY MANUFACTURING PMI

Midway through the second quarter of 2024, Malaysia's manufacturing sector conditions improved with renewed growth in new business and production. Job creation occurred for the first time in five months, although firms were cautious about acquiring inputs due to a marginal expansion in new orders. However, business confidence declined. Malaysia's PMI surged to 50.2 in May (Apr: 49.0), surpassing the 50.0 neutral mark and indicating a renewed improvement in manufacturing sector conditions after 20 months of moderation. Production levels returned to expansion for the first time since July 2022, albeit only marginally. This was supported by renewed growth in new orders, marking an end to 20 successive months of subdued demand conditions. Manufacturers hired more staff due to rising new orders, leading to improved employment conditions. Despite an expansion in new orders and production accompanied by rising inflation, the rates of increase in input costs and output prices remained subdued compared to historical standards.

OUTLOOK

Overall sentiment remained positive among Malaysian manufacturers, with expectations of higher output in the coming year. However, confidence levels eased, impacting manufacturers' willingness to acquire input inventories. Monitoring these areas will provide further insights into potential signs of a turnaround. May's Malaysia PMI number indicated a promising start to a broader recovery in the second half of 2024. This is due to anticipated improvements in the unemployment rate and ongoing growth in distributive trade sales, supported by rising tourist arrivals and spending. Malaysia's trade performance surged with double-digit growth of 12.1% in April 2024, reaching RM211.74bn compared to the same month last year, suggesting it is on track to meet economic targets propelled by rebounding external trade and domestic demand growth. Recently, Prime Minister Anwar Ibrahim emphasized Malaysia's target to attract RM500bn in semiconductor investment, supported by RM25bn for the National Semiconductor Strategy (NSS) to drive high-value developments. This is likely to enhance the anticipated recovery in the manufacturing sector, potentially driven by an increase in electronics and electrical (E&E) industries, particularly in the second half of 2024, which bodes well for domestic growth. However, caution is necessary due to ongoing geopolitical challenges causing prolonged disruptions in supply chains and shipping routes, potentially impacting global trade and Malaysian exports negatively.

Source: BIMB Securities Research - 5 Jun 2024