Weaker manufacturing PMI due to lower export orders

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to 48.8 in January from an expansion level of 50 in December. IHS Markit guided that the deterioration in manufacturing PMI was due mainly to lower export orders, which contracted for the first time in three months. In the survey, manufacturers guided that lower orders registered in January were due partly to sustained tough global trading environment. Besides that, it also noted that there was a drop in backlogs as manufacturers were able to meet demand in a timely manner. Despite the drop in PMI, manufacturers were optimistic on the outlook of the manufacturing sector as output expectations remained above its historical average led by forecasts of higher demand, supportive state policies and planned expansion into foreign markets possibly following the signing of the ‘Phase one’ trade deal. In China, the Caixin China manufacturing PMI dropped slightly to 51.1 in January from 51.5 in December but remained above 50 for the sixth consecutive month. Meanwhile, Asean manufacturing PMI increased to an eight-month high of 49.8 in December from 49.7 in November. However, the region’s PMI reading has remained in the contractionary region since June 2019.

Despite the fall in Malaysia’s manufacturing PMI in January, we believe that this may be temporary as IHS Markit noted that business trends tend to be volatile around the year-end, and we also believe at the beginning of the year due to the festive season. Malaysia’s manufacturing PMI may continue to bottom out and likely recover in the coming months. We expect the signing of the ‘Phase one’ trade deal may likely support business sentiment in the near term. However, uncertainties surrounding China’s economic slowdown will remain as a headwind to Malaysia’s manufacturing PMI. We are also concern that if China is unable to meet its end of the trade deal, such as meeting the required purchases of the US farm products, this may cause possible reescalation in trade tensions. Besides that, we also believe the ‘Phase two’ deal will be signed only in 2021, after the US Presidential elections in November 2020, which suggests no further rollbacks in the earlier imposed 25% tariffs on US$250bn worth of Chinese imports.

IHS Markit’s nowcast suggests that Malaysia’s real GDP growth will likely expand around 5%, possibly in 4Q19. However, in 4Q19, we believe Malaysia’s real GDP growth to likely expand by 4.5% estimated for 4Q19, slightly higher than 4.4% in 3Q19. BNM will release the 4Q19 GDP figures on 12th February 2020. For the full year 2019, we are maintaining our GDP growth projection of 4.7% in 2019 (4.7% in 2018). However, in 2020, we expect the country’s real GDP growth to slow by 4.5%, slightly lower than the current official forecast of 4.8%, where trade war uncertainties will remain as a downside risk. Nevertheless, we believe some of the Budget 2020 measures, recent 25bps Overnight Policy Rate (OPR) cut as well as healthy labour market will support domestic demand, particularly private consumption growth. We believe the recent coronavirus (2019-nCoV) outbreak will have some implications on the domestic economic activity, especially in the tourism and retail sectors. We believe the recent Wuhan outbreak will also have impact on Malaysia’s manufacturing sector performance due to possible disruptions to the global supply chain to trade and manufacturing. However, currently, there have been no cases of transmission of the virus across international borders from shipment of goods via air freight or sea shipping of cargo.

Source: Affin Hwang Research - 4 Feb 2020