Manufacturing PMI Dropped to the Lowest Level in Five Months Period

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell significantly by 2.3 points to 49.2 in October, after staying above the expansion level of 50 level mark for two consecutive months since August 2018. The slowdown was attributed to lower new sales and output, arising partly from weaker domestic markets after the reintroduction of Sales & Services Tax (SST) in September. According to the report, with global raw material prices rising and Ringgit weakening against US$, as well as the SST introduction, input cost inflation in the country’s manufacturing sector may increase. However, due to slower demand, we believe that manufacturers may unlikely pass the higher cost by raising prices to consumers. New export order from external demand rose slightly in September, amid some recovery in external demand, particularly from US and Southeast Asia region. In contrast, the number of employment in October continued to rise albeit at a moderate pace.

Going forward, we expect Malaysia’s economic activity to remain modest in 4Q18, as reflected in the Department of Statistics’ leading indicator (LEI), which fell further by -0.9% yoy in August (after the pace of growth slowed from 0.4% yoy in June to -0.1% yoy in July). This was also consistent with survey released by MIER, where the latest business condition index (BCI) and consumer sentiment index (CSI) eased slightly in 3Q18. In particular, the BCI slowed from 116.3 in 2Q18 to 108.8 in 3Q18, while CSI slowed by 25.4 points to 107.5 (132.9 in 2Q18). However, both remained above 100- threshold level for second quarter. Despite some uncertainties from the external environment, we expect the country’s real GDP growth to improve from 4.5% yoy in 2Q18 to around 5.0-5.2% estimated for 3Q18, partly supported by the tax holidays. The country’s full year GDP growth is expected to be around 5% projected for 2018 (5.9% in 2017). The downside risks to the country will likely be the global trade tensions, which have increased following the tariff threats and trade restrictions by US.

In the Asean region, Thailand’s PMI also recorded a contraction in October, falling to 48.9 in October from 50 in September, and its lowest reading in two years. This was attributed to lower output, new orders and employment during the month. Similarly, Indonesia’s manufacturing PMI also slowed further to 50.5, but remained in expansion level for nine straight month. According to IHS Markit, the marginal decline was due to weak demand from both local and abroad, as new order intake fell for the first time since January.

Source: Affin Hwang Research - 2 Nov 2018