• Output rose for the second month in a row while new orders maintained a similar pace in July \
• Higher input costs and lower operating capacity caused employment to scale back for the fourth consecutive month
• For the whole of 2020, we maintain our real GDP growth forecast of -3.5%, compared to the official forecast range of between -2.0 to 0.5%

Malaysia’s manufacturing PMI supported by output and new orders

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) expanded by 50 in July, slightly lower than 51 in June, but maintaining its position in the expansionary level for the second consecutive month. The July’s PMI was above the survey’s long-run average of 49. IHS Markit noted that output rose for the second month in a row while new orders maintained a similar pace as the previous month during the month. Besides that, overall confidence over the next 12 months continued to be elevated, where sentiment was only slighlty lower compared to levels seen in June

However, several producers guided that demand remained weak due to the impact of the pandemic on the manufacturing sector. As a result, new export orders had softened in July. In addition, the latest PMI noted that input costs rose sharply in July for the second consecutive month by its quickest pace since October 2018, due to supply shortages for raw materials. With lower operating capacity and rise in input costs, employment was scaled back for the fourth consecutive month. Besides that, it was also highlighted that producers still faced transportation issues attributed to the impact of the pandemic as suppliers’ delivery times increased for the eighth month in a row.

Malaysia’s exports already turned around to register a positive growth of 8.8% yoy in June, after recording three consecutive months of negative growth (-25.5% in May), attributed to further re-opening of the economy (especially factory operations). Likewise, the country’s Leading Index (LEI) turned around by 0.6% yoy in May from -5.7% in April, suggesting a gradual pick up in the economy in the months ahead. As reflected by latest economic indicators, we expect country’s real GDP growth to decline sharply in 2Q20, but showing some signs of recovery in 2H20. Our estimates show that real GDP will likely decline by -4.9% yoy estimated for 1H20, with smaller decline of 2% in 2H20, due to the reopening of businesses under the RMCO which began on June 10. For the whole of 2020, we maintain our real GDP growth forecast of -3.5%, lower than the official forecast range of -2.0 to 0.5% (4.3% in 2019). BNM will release the 2Q20 GDP figures on 12 August 2020.

China’s manufacturing sector continued to recover in July where the Caixin China General Manufacturing PMI rose for the third month in a row to 52.8 in July from 51.2 in June, its highest level since January 2011 led by higher output and new orders as well as firmer customer demand. Meanwhile, among Asean countries, Thailand and Indonesia registered higher readings in July despite remaining below the 50-level mark at 45.9 and 46.9, respectively (43.5 and 39.1 in June, respectively) as production and new orders had declined at a slower pace during the month. However, in the Philippines, PMI fell from 49.7 in June to 48.4 in July attributed to the decline in output levels and new work, weaker export demand, further rise in job losses and sustained drop in business confidence. In the coming months, recovery in PMI readings in the Asean region could face some headwinds particularly from a potential second wave of Covid-19 cases as economies gradually reopen. Moreover, external demand may remain weak in the coming months amid slower global growth, supply chain disruptions and persistent uncertainty surrounding the pandemic. Nevertheless, the sustained recovery in China’s manufacturing PMI will bode well for Malaysia’s economic growth as China is one of the country’s main trading partners. The steady improvement in Malaysia’s July PMI reading was in line with our projection for GDP growth bottoming out in 2Q20.

Source: Affin Hwang Research - 4 Aug 2020