Asean Manufacturing PMI Fell to 48.9, Lowest Since November 2015

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to 47.4 in August from 47.6 in July, deteriorating for the fourth consecutive month and its lowest reading since March 2019. IHS Markit guided that the decline in PMI was due to weak demand conditions and higher cost pressures amid competitive pressures and lower demand from key export markets. IHS Markit also noted that the global trade war concerns had weighed on sales.

Despite this, the survey showed that producers were still optimistic over the next 12 months as reflected by the business confidence, where it rose to its highest level since October 2013. Besides that, producers also projected better domestic and external demand which had also contributed to the stronger confidence level according to anecdotal evidence as highlighted by IHS Markit. As a result of higher expectation of sales by producers going forward, employment has increased in August, the first time in three months.

According to IHS Markit’s nowcast of Malaysia’s GDP growth, the August PMI reading of 47.4 suggests that real GDP growth will likely be slower in 3Q19. However, this was still indicative of a real GDP growth of 4.5% yoy, possibly in 3Q19 (as compared to 4.9% in 2Q19). This was in line with our projection of real GDP growth of a slightly slower 4.7% in 2H19 after posting a strong expansion of 4.9% in 1H19. Therefore, we expect Malaysia’s real GDP growth to expand by 4.7% in 2019 similar to the growth registered in 2018 driven by continued growth of domestic demand.

Going forward, the downside risks to global economy remains. We expect external headwinds, especially from the ongoing trade tensions and global growth slowdown, to likely weigh on Malaysia’s manufacturing production in 2H19 and 2020. If trade tensions escalate further, this will likely weigh on overall demand conditions. On 1 September 2019, the US government went ahead with the latest tariffs previously announced on more than US$125bn at 10% worth of Chinese imports by the US as well as additional retaliatory tariffs of 5%-10% by China on US$75bn worth of US imports had come into effect.

Global semiconductor sales in June contracted by 16.8% yoy from 14.7% in May. Demand for Malaysia’s electrical and electronic (E&E) products may also be lower in the months ahead, where in June, Malaysia’s exports of E&E declined by 6% yoy from a growth of 0.6% in May. However, China’s Caixin/Markit Manufacturing PMI rebounded from 49.9 in July to 50.4 in August after two straight months of contraction and if the uptick is maintained will likely provide some support to the Asean region manufacturing sector.

Asean manufacturing PMI fell for the third consecutive month to 48.9 in August from 49.5 in July, its weakest reading since November 2015. The region’s PMI was dragged by lower new business inflows and a second consecutive month of decline in output. In addition, IHS Markit noted that the largest decline in external demand since November 2015 had acted as a drag on new orders. Among the Asean-5 countries, the Philippines was the only country to post a reading above the 50-level mark of 51.9. Meanwhile, Singapore (42.9) and Indonesia (49.0) remained in contraction. As for Thailand, its PMI reading was at 50 signalling no change in its operating conditions.

Source: Affin Hwang Research - 4 Sept 2019