Sharp Drop in Manufacturing PMI Was Almost Across the Board

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) unexpectedly fell in May to 48.7. Excluding the one month above the expansionary level at 50.7 in April, PMI has remained in contraction territory (below 50) over twentyfour months since April 2015, see Fig 1. According IHS Markit, the sharp drop in May manufacturing PMI was almost across the board, except for employment, all other key sub-components such as production, new orders and purchasing activity of the PMI trended lower during the month.

However, the most significant decline was in new orders sub-component, which reflected the decline in new orders from nearby Asian economies, such as Singapore, Thailand and Indonesia. In its latest report on Malaysia PMI, IHS Markit cautioned the downside risk and noted that “the latest fall marked a resumption of the trend seen for more than two years prior to April’s fractional expansion.” We believe the softening trend seen in Malaysia’s manufacturing PMI was also reflected in other Asean region PMI indexes during the month, indicating some cautiousness among manufacturers in the region on new orders and international trade, dampened by some slowdown in global economic conditions in 2Q17. The Caixin China General Manufacturing PMI declined by 0.7 points to 49.6 in May (50.3 in April), falling below the 50-threshold mark for the first time in eleven months, pointing to some slowdown in the global manufacturing activities in 2Q17 and 3Q17.

Malaysia’s real GDP growth reached 5.6% yoy in 1Q17, as compared to 4.5% in 4Q16, attributed to healthy domestic demand and strong performance from manufacturing, construction and agriculture sub-sectors. In the first two months of 2Q17, Malaysia’s manufacturing PMI averaged around 49.7, slightly higher than the average of 49.2 in 1Q17. Even with the unexpected drop in May PMI, we believe the country’s economic growth will likely be sustained at around 5.2% yoy estimated for 2Q17, where we are maintaining our full year GDP growth projection of 4.8% for 2017 (4.2% in 2016).

This was also supported by Malaysia’s leading economic index (LEI), published by Department of Statistics (DOS), which increased further from 1.1% yoy in February to 1.8% in March, supported by improvement in the country’s money supply, real imports of semi- conductors, sales value and unit labour cost in manufacturing, as well as new companies registered.

Source: Affin Hwang Research - 2 Jun 2017