Contraction of Manufacturing PMI in Indonesia, Malaysia and Singapore

Asean Manufacturing Purchasing Managers’ Index (PMI) fell further for the third consecutive month to 48.9 in August from 49.5 in July, its lowest reading since November 2015. This was also the third month where the region’s PMI has been below the 50-level region. According to IHS Markit, the index was weighed down by a drop in new business inflows and a second straight month of decline in output. It also noted that new orders were also dragged by the external demand which registered its largest fall since November 2015.

Among the Asean countries, Indonesia and Malaysia fell sharper in August while Philippines, Thailand and Vietnam slowed in August. Indonesia’s PMI contracted by 0.6 points to 49.0 (49.6 in July), its lowest reading since July 2017. Meanwhile, Malaysia’s PMI registered contraction for eleventh consecutive month to 47.4 in August (47.6 in July). At the same time, Singapore’s manufacturing PMI deteriorated to 48.7 in August (51.0 in July). Going forward, the continuation of trade war with a recent 10% tariff by US on US$125bn Chinese imports and the tit-for-tat from China on US$75bn worth of US products will possibly impact the ASEAN manufacturing sector with disruption in global supply chain. Nevertheless, in the short run, we believe some countries would benefit from the trade war through trade diversion.

Separately, Indonesia’s inflation rate in August rose by 3.5% yoy after remaining steady at 3.3% for three month in a row. The inflation rate was still within the range of Bank Indonesia’s target of 2.5-4.5%. Higher inflation in August was primarily contributed by food prices which picked up by 5.8% yoy in August from 4.8% in July. Similarly, the price of clothing up by 1.0 percentage point to 5.2% in August. We believe that the higher prices were also driven by Eid al-Adha and it is expected to recede in the following months. Moving forward, as the increase in CPI was due to a seasonal factor, we expect BI may possibly cut its policy rate further if the ongoing trade war and tariff fight between US and China continues.

However, Thailand’s inflation improved to 0.5% yoy in August after rising by 1.0% in July, its lowest rate since January 2019, due to smaller increase of price for food and non-alcoholic beverages in August of 2.6% yoy (3.5% in July) as well as the decline in transport and communication cost. In the first eight months of the year, headline inflation averaged 0.9%, below the Bank of Thailand’s (BoT) inflation target of 1-4%. However, we believe that the despite the recent 25bps rate cut, we do not discount the possibility of another rate cut to support the economy together with the injection of fiscal stimulus package amounted THB370bn to support the farmers, middle-income earners, small business as well as tourism industry.

Source: Affin Hwang Research - 6 Sept 2019