Reflecting a Broad Stabilisation in Manufacturing Conditions

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) improved from 49.5 in June to 49.7 in July, the highest level in five months, reflecting a broad stabilisation in manufacturing conditions across the country. The improvement was reflected mainly in the higher output during the month, after four months of contraction, signalling healthy demand conditions. Likewise, employment has risen eight times in the past nine months, despite only marginal increase in job creation. Other PMI components, in particular, new orders slowed in July.

In contrast, according to IHS Markit, new export orders rose for the first time in six months on higher demand from overseas. Malaysia’s exports grew by 3.4% yoy in May, but we believe will likely trend higher in June and July, due to better demand for manufactured goods. With the rate of global manufacturing PMI expansion holding steady from 53 in June to 52.7 in July, we expect growth in Malaysia’s exports and industrial production to stay healthy in 2H18. The country’s domestic demand, in particular private consumption growth, will be supported by zero tax holiday from between June to August 2018. Markit also noted that the country’s sentiment has improved in anticipation of higher demand and possible new projects in the upcoming months. This was also consistent with recent survey released by MIER, where the latest business condition index (BCI) and consumer sentiment index (CSI) rose sharply and pointing to further stabilisation in Malaysia’s manufacturing activity. In particular, the BCI rose from 98.6 in 1Q18 to 116.3 in 2Q18, while CSI rose sharply by 41.9 points to 132.9 (91 in 1Q18).

International Monetary Fund (IMF) cautioned on the downside risks to global growth, highlighting in its July publication that the global economic outlook continues to remain uncertain and uneven. This include “rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals.” US President Trump warned further of a plan to propose higher tariffs, from 10% to 25% on US$200bn in Chinese imports, which we believe will put some pressure on China’s economy. In early July, US had imposed 25% tariffs on US$34 billion of Chinese goods. China has about 13% share of Malaysia’s total exports, and about 14% of our manufactured goods are shipped to China. We believe the impact on Malaysia will be from the trade channel as in Malaysia’s manufacturing sector, exports to China are mostly in intermediate inputs, to produce as final products by China to be sold to US.

Source: Affin Hwang Research - 2 Aug 2018