• Production lost some of its momentum but remain stable while demand continued to recover in August
• Our estimates show that real GDP will likely decline at a gradual pace of around 0.8% yoy in 2H20, from -8.3% in 1H20, and average -4.5% for 2020
• We believe gradual recovery in Asean and China PMI readings bodes well for Malaysia’s economic growth in 2H20 and 2021

Malaysia’s Manufacturing PMI Supported by Output and New Orders

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell below the expansionary level for the first time in two months to 49.3 in August from 50 in July. However, the August’s PMI reading was still slightly above the survey’s long-run average of 49. IHS Markit noted that production lost some of its momentum from the intial ease in lockdown measures but remained stable during the month. Demand continued to recover where the pace of moderation was similar to that registered in June and July. New orders remained healthy supported by ongoing improvements in demand following the gradual reopening of the economy. However, producers noted that foreign customer demand remained weak, where new export orders continued to fall led by ongoing restrictions in several export markets.

Similar to the previous month, there continued to be spare capacity amid a reduction in backlogs of work. In addition, raw material shortages had also caused cost pressures for producers. As a result of lower operating capacity and firms’ efforts to lower costs, employment continued to be scaled back where the fall in employment in August was the sharpest since the survey began in 2012. Besides that, material shortages and issues related to receiving imported goods due to Covid-19 caused suppliers’ delivery times to lengthen. Nevertheless, there were some signs of improvement on suppliers’ delivery times in August. Meanwhile, according to the survey, business sentiment dropped below the series average due to sustained Covid-19 concerns despite hopes that new orders will rise on the back of a return to more normal business conditions.

Despite the lower PMI reading in August, IHS Markit guided that the loss in momentum from the initial rebound from the lockdown is expected. We also believe that the recovery of Malaysia’s manufacturing sector will continue in tandem with the sustained improvement in exports growth which maintained a positive growth for the second consecutive month of 3.1% yoy in July (8% in June). Similarly, the Leading Index (LEI) rose for the second month in a row by 4.5% yoy in June from 0.6% in May, which suggests some expected recovery in 2H20, as more economic activities open up. Our estimates show that real GDP will likely decline at a gradual pace of around 0.8% yoy in 2H20, from -8.3% in 1H20, and average around -4.5% for full year 2020 (revised lower from our previous estimate of -3.5%), at the mid-range of the official forecast between -3.5% and -5.5%.

Elsewehere, China’s General Manufacturing PMI manufacturing sector continued to rebound strongly in August, as it rose for the fourth consecutive month to 53.1 in August from 52.8 in July, its highest level since January 2011 supported by higher output, new orders, export sales and firmer demand conditions. As for Asean region, the manufacturing PMI increased to 49.0 in August from 46.5 in July, underpinned by the slower fall in new orders. Among the Asean countries, only Myanmar and Indonesia registered readings above 50 at 53.2 and 50.8, respectively while Thailand (49.7), Philippines (47.3), Vietnam (45.7) and Singapore (43.0) remained below 50 in August. In the coming months, we believe gradual recovery in Asean and China PMI readings bodes well for Malaysia’s economic growth however the risk of a second wave and reimposition of containment measures may weigh on pace of the country’s recovery.

Source: Affin Hwang Research - 2 Sept 2020