Weak External Demand Continued to Drag the Manufacturing PMI

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell sharply by 0.9 points to 48.6 in April (49.5 in March), the lowest level in six months. This was the third consecutive months of decrease since January this year. The sharp drop was attributed to sharp deterioration in output and new orders. According to Markit, production fell in April due to subdued demand conditions, which led to firms reducing their purchasing activity and preproduction inventories. April’s PMI survey also showed employment growth picking up slightly during the month, but on the price front, firms continue to face higher input costs, which experienced the sharpest increase since September last year.

Despite weak Malaysia’s PMI, we believe the Asean PMI will likely trend higher in April, as improvement was reflected in other Asean-5 countries. In particular, Indonesia’s PMI rose sharply by 0.9 percentage points to 51.6 in April (50.7 in March), the strongest improvement in manufacturing conditions since June 2016. Philippines’ manufacturing PMI also rose from 51.5 in March to 52.7 in April, the highest for the year so far, signalling a robust improvement in the health of the sector.

Even though Malaysia continued to register manufacturing PMI below the 50 threshold, Markit noted that the country’s business sentiment towards the 12- month outlook for output was at the strongest level since October 2013. This was due to firms remaining upbeat about their prospects, where firms continued to expand capacity by raising their payroll numbers.

The country’s leading index (LI), an indicator designed by Department of Statistics (DoS) to predict the direction of the economic activity, expanded by 1.1% yoy in April, albeit slower than 2.1% in March, signalling continued strength in the domestic economy, but at a slower pace.This is also in line with Malaysia’s consumer confidence, as reflected in the MIER’s consumer sentiment index (CSI), which recovered further from 82.6 in 4Q17 to 91 in 1Q18, the strongest reading since 4Q14, which likely to translate into a strong growth in domestic demand in 1H18. Nonetheless, the MIER’s retail trade and auto industry index, moderated to 69.8 and 120.8 respectively in 1Q18 (85.2 and 141.7 in 4Q17). We expect the country’s real GDP growth rate to slow from 5.9% yoy in 4Q17 to 5.2% estimated for 1Q18. We continue to maintain our full-year GDP growth of about 5.3% for 2018, lower than 5.9% in 2017.

Source: Affin Hwang Research - 3 May 2018