Global Manufacturing PMI Remained Below the Threshold of 50

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) rose to 51 in June (45.6 in May), surpassing the expansion threshold of 50 for the first time since December 2019. This was also its highest reading since September 2018. IHS Markit noted the increase in PMI in June was partly attributed to the partial lifting of lockdown restrictions enabled factory operations to restart, which we believe, in tandem with the commencement of the Recovery Movement Control Order (RMCO) from 10th June 2020. IHS Markit noted that output growth has matched its survey high due to the rise in number of businesses that have restarted operations. A number of firms also reported a rise in operating rates which cleared backlogs. In addition, business confidence rose to a four-month high in June following encouraging signs of recovery. New orders also rose to a six-month high in June amid re-opening of certain industries reflecting improving demand conditions. However, according to IHS Markit, overseas demand continued to be weak due to the ongoing pandemic while manufacturers reported slower input lead time due to travel restrictions and large backlogs experienced by suppliers. This was reflected in Malaysia’s exports, which declined by 25.5% yoy in May, a sharper contraction when compared to -23.8% in April. With the economy operating at higher capacity with the reopening of various sectors and businesses/factories, and improvement in manufacturing production, we believe smaller magnitude of decline in exports from June onwards.

The global manufacturing PMI remained below the threshold of 50, but improved to 47.8 in June (42.4 in May). The IHS Markit report highlighted that restrictions and lockdowns in place to combat the COVID-19 pandemic continued to exert stress on global supply chains in June. In other countries, for instance China, the Caixin General Manufacturing PMI increased from 50.7 in May to 51.2 in June, its second month above 50 and its best reading since December 2019, led by increased production, as well as increase in total new work and a rise in business confidence to a four-month high. The Asean region rose for the second consecutive month, but remained weak at 43.7 in June (35.5 in May), its fourth month in a row below the 50-level mark. The slower declines in output and new orders during the month were dragged by firms continuing to cut jobs due to anticipated weak demand conditions. Among the Asean countries, Vietnam (51.1) and Malaysia (51.0) recorded PMI readings above 50, while Philippines (49.7), Myanmar (48.7), Thailand (43.5), Indonesia (39.1) and Singapore (38.8) remained in the contractionary region. However, we believe the recovery in PMI readings in the region could likely continue in the coming months amid gradual reopening of the economies. However, we expect external demand to remain weak amid slower global growth, supply chain disruptions, persistent uncertainty surrounding the pandemic.

As growth in exports contracted sharply in 2Q20, we expect Malaysia’s real GDP growth to decline by between 8 to 9% yoy during the quarter (GDP numbers to be released on 12 August). Based on our estimates in 1H20, real GDP growth will likely decline by 4.2% yoy in 1H20 before improving slightly at a pace of -3% in 2H20, averaging -3.5% in 2020 (4.3% in 2019). However, we believe that the reopening of businesses and all essential services under RMCO will continue to be supportive of the domestic economy, but weaker global growth will remain a drag as both external demand and manufacturing production may still be affected by global supply chain disruptions.

Source: Affin Hwang Research - 2 Jul 2020