Reflected in Increase in New Orders and Output in September

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) recovered to 47.9 in September from 47.4 in August, but remained below the 50-level since October 2018. According to IHS Markit, slightly higher PMI reading during the month was supported by increased in new orders, led by improvement in sales to existing customers, while output had also increased although it stayed close to levels seen across 3Q19. Backlogs had also improved for the thirteenth straight month as some firms reported the need to focus on productivity gains while some used old stock to fulfil unfinished work. As current and future workloads were sufficient, employment was steady in September. However, IHS Markit guided that producers still faced challenges as clients held out for price discounts due to strong competitive pressures. Furthermore, they added that external demand was also weak as orders from key export markets continued to fall. Similar to August, producers remained optimistic over the next 12 months as they expect production volumes to be higher amid expectations of higher demand from domestic and external clients as well as planned development of new products.

However, weaker global economic environment and geopolitical uncertainties had also weighed on optimism in September. On a quarterly basis, Malaysia’s manufacturing PMI averaged 47.6 in 3Q19, lower than 48.7 in 2Q19 but matching the 1Q19 average of 47.6. According to IHS Markit’s nowcast of Malaysia’s GDP growth, the September PMI reading of 47.9 suggests that real GDP growth will expand between 4.5-5.0% in 3Q19 compared to 4.9% in 2Q19. For the full year 2019, we expect Malaysia’s real GDP growth to expand by 4.7% in 2019 (4.7% in 2018), supported by continued expansion of domestic demand.

Going forward, we believe Malaysia’s manufacturing production will continue to be dragged by ongoing global trade tensions and possibly global growth slowdown. Besides that, demand for Malaysia’s electrical and electronic (E&E) products may also be hampered by the sustained contraction in the global semiconductor sales, where in August, sales contracted by 15.9% yoy from 15.5% in July, its eighth month of decline. In the upcoming Budget 2020 to be announced on 11 October 2019, in view of the uncertain outlook for the domestic manufacturing sector, we believe the possibility of some budget measures being introduced to support producers, especially SMEs in the manufacturing sector amid global slowdown anticipated in 2020.

Asean manufacturing PMI also improved slightly in September to 49.1 from 48.9 in August, after falling for three consecutive months. However, the region’s PMI has stayed in the contractionary region since June 2019. IHS Markit noted that the region’s PMI was weighed down by the sharpest drop in production since July 2017 while new orders also declined again in September. The Philippines and Thailand were the only two among the Asean-5 countries to register a PMI reading above 50 at 51.8 and 50.6, respectively. Meanwhile, Indonesia inched slightly higher to 49.1 but remained in contraction, while Singapore’s PMI of 43.1 was among the lowest readings since the series began in August 2012. On the global front, global manufacturing PMI improved to 49.7 in September (49.5 in August), but may trend lower in the months ahead, as the US ISM PMI unexpectedly weakened to 47.8 in September from 49.1 in August, lower than market expectations of 50.1, signalling possible weakness in the US manufacturing sector.

Source: Affin Hwang Research - 2 Oct 2019