Malaysia’s PMI Fell to a Four-month Low of 47.6 in July

Asean manufacturing Purchasing Managers’ Index (PMI) slowed further for the second consecutive month to 49.5 in July from 49.7 in June. This was its second straight month below the 50-level mark and its lowest reading in two years. Out of the seven countries, Myanmar (52.9), Vietnam (52.6), Philippines (52.1) and Thailand (50.3) continued to remained in the expansionary above-50 region. However, Indonesia, Singapore and Malaysia fell further to 49.6, 47.6 and 44.5, respectively in July. IHS Markit guided that PMI weakened due to a fall in overall output, which was the first decline since July 2017, while employment continued to fall. However, there was a marginal increase in new orders and demand conditions improved supported by the rise in foreign sales in a year. Malaysia’s manufacturing PMI fell for the third consecutive month to 47.6 in July from 47.8 in June, remaining below the 50-level since October 2018. IHS Markit guided that weak overall demand conditions weighed on production and caused some firms to take a more cautious approach towards hiring.

Going forward, we expect PMI reading for the region to remain weak as trade war uncertainties continue. US President Trump recently announced that US will impose a 10% tariff on the remaining US$300bn in Chinese imports, likely to be imposed beginning 1 September 2019. Global manufacturing PMI already weakened further to 49.3 in July (49.4 in June), below 50 level for the third straight month and its lowest level since October 2012. In particular, Eurozone Manufacturing PMI fell sharply to 46.5 in July (47.6 in June). Besides that, we believe that the deteriorating global semiconductor sales will also continue to weigh on the performance of the E&E segment in the region. Furthermore, as the region has a large export exposure to China, the sustained contraction of Chinese imports in June by 7.3% yoy ( -8.5% in May) also suggests lower Chinese demand. Although China’s Caixin manufacturing PMI has increased in July to 49.9, it has remained below the 50-level mark since June 2019. Nevertheless, supported by domestic demand, we continue to expect Malaysia’s real GDP growth in 2Q19 to be in a range of 4.3-4.5% compared to 4.5% in 1Q19. For the full-year, we are maintaining Malaysia’s real GDP growth target of 4.5% (4.7% in 2018).

Separately in Indonesia, the headline inflation remained steady at 3.3% for the third straight month in July which is still within Bank Indonesia’s (BI) inflation target range of 2.5-4.5%. Higher cost was registered for clothing, education, recreation and sports as well as transportation, communication and finance. We believe that inflation will continue to remain steady as inflation continues to ease following Ramadan and Eid al-Fitr months. Therefore, this provides room for BI for further monetary policy easing following its last 25bps rate cut in July.

Source: Affin Hwang Research - 2 Aug 2019