Manufacturers Are Increasing Payroll Numbers to Meet Higher Demand

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) rebounded to 50.5 in January, from 49.9 in December 2017 (52 in November). The improvement in January’s PMI manufacturing was attributed to the rise of new business and greater inflows of new work. According to IHS Markit, manufacturers are increasing their payroll numbers for the month underpinned by higher new orders. The level of sentiment towards the 12- month outlook for output was the joint-strongest since December 2013.

Goods-producing sector continue to experience positive momentum with new exports order increasing for the third consecutive month in January. The latest report showed companies linked higher new orders to improving underlying demand conditions, particularly from the Europe and Asia region. In line with the higher order, Malaysian manufacturers are also increasing their payroll numbers for the third consecutive month, despite the rate of job creation being marginal. However, input buying fell for the second month in January leading to fall in pre-production inventories, signalling cautious stance by the manufacturers on future demand. Input cost continue to increase, which we believe was partly due to higher transportation cost and raw material.

In the same month, global PMI moderated slightly from 54.5 in December 2017 to 54.4 in January 2018. Despite the moderation, the PMI number was still the second highest since March 2011. The strength in the global manufacturing PMI could be seen across the region, with US manufacturing PMI at 34-month high in January at 55.5, while Eurozone PMI was at its second highest record high at 59.6. China manufacturing PMI remained strong at 51.5, while its output growth hits 13-month high in January.

In tandem with the strong global manufacturing PMI, ASEAN manufacturing PMI also remained healthy, above the 50-point expansionary threshold at 50.2 in January (49.9 in December). However, the ASEAN manufacturing PMI was dragged down by Singapore PMI (46.4) and Indonesia (49.9).

Moving forward, a series of global economic indicators are pointing towards sustained growth in the manufacturing activity in 2018. Despite Malaysia manufacturing PMI is only slightly higher than the 50-point threshold level at 50.5, we believe domestic manufacturers will remain positive in line with improvement in business conditions in the global manufacturing sector, where Malaysia will likely benefit from more new export orders from abroad, especially in the electronics and electrical (E&E) sector. IMF has recently revised its global growth forecast upward from 3.7% to 3.9% for 2018, reflecting increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.

Malaysia’s PMI and leading economic indicators (LEI) suggest that the country’s real GDP growth will likely sustain, though slower, from 5.9% yoy estimated for 2H17 to around 5.0-5.5% estimated for 1H18E. We are currently maintaining our full-year GDP growth at 4.9% for 2018 (5.7% estimated 2017), with growth expected to slow in 2H18, but note there are upside potential to our projection.

Source: Affin Hwang Research - 5 Feb 2018