Asean Region’s PMI Showed Overall Demand Improved in 1Q18

ASEAN manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 in February from 50.2 in January, its highest reading since November 2017. It remained in the expansionary region above 50 for the second consecutive month. On a quarterly basis, the Asean PMI rose to 50.5 in January-February, higher than 50.4 in 4Q17, indicating improvement in the operating conditions for the region’s manufacturing industries in 1Q18. According to IHS Markit, the ASEAN PMI was supported by further expansion in output, new orders and employment, where of the seven countries, five showed increases in their PMIs, while Malaysia and Singapore PMIs had contracted.

Vietnam’s PMI had the strongest manufacturing growth in ASEAN with a tenmonth high reading of 53.5 in February. Indonesia’s PMI rebounded to 51.4 in February, following a weaker performance of 49.9 in January. Meanwhile, Thailand’s PMI expanded from 50.6 in January to 50.9 in February, its highest level since December 2015. The region’s PMI showed overall demand improved, where ASEAN manufacturers continued to rev up production, while higher output requirements had caused business to increase employment to a 20-month high. However, while there were some signs of spare capacity within the ASEAN manufacturing sector, we believe continued decline in backlogs of uncompleted orders likely suggest the need for more new orders going forward. Recent strong growth in the region's manufacturing sector was supported by higher demand for manufactured goods from China and US, mainly for semiconductor products, and in tandem with strong growth of global semiconductor sales, which increased further by 22.7% yoy in January. However, the downside risks to the region’s manufacturing sector will likely be the global trade tensions, which have increased following the tariff threats and trade restrictions by US. This may lead to other countries retaliating (especially China) and imposing taxes and other measures on imported American goods, that could potentially lead to a global trade war.

Separately, on the regional inflation front, Philippines inflation rate surprised on the upside, rising sharply from 4% yoy in January to 4.5% in February, breaching the central bank’s target range of 2%-4%. This was led by the rise in prices of alcoholic beverages and tobacco, which rose by 17.1% yoy, possibly due to the implementation of higher taxes on tobacco of P32.50 from P30 previously under the Tax Reform for Acceleration and Inclusion (TRAIN) bill. Despite this, Philippine Finance Secretary Carlos Domiguez recently stated that Bangko Sentral ng Pilipinas (BSP) does not need to raise rates yet as inflation will probably moderate amid tougher monitoring of retailers who may artificially increase prices. Although BSP has kept it interest rate at 3.0% since shifting to the interest rate corridor system in June 2016, we do not discount the possibility of a rate hike if inflation continues to accelerate.

Source: Affin Hwang Research - 9 Mar 2018