• Output moderated for the first time in four months in September as new orders continued to slow down
• Business confidence over the next 12 months rose in September to a ninemonth high as firms predicted improvements in new orders as market conditions gradually normalise.
• For the full year 2020, we maintain our GDP growth projection of -4.5% which is at the mid-range of the official forecast between -3.5% and -5.5%

Output Moderated in September as New Orders Slowed

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) slowed for the third consecutive month to 49.0 in September from 49.3 in August. This was also its second month dipping below the 50-level expansionary level. In September, output slowed for the first time in four months as new orders continued to trend lower to its slowest pace in 2020. IHS Markit guided that total new business was impacted by a fall in new export orders on the back of ongoing Covid-19 related disruptions in some countries. Besides that, the slowdown in output was reflected in both employment and input buying in September, where employment had declined for the sixth consecutive month. Despite this, firms continued to work through outstanding businesses amid lower new orders. In contrast, despite the temporary setback on September’s PMI, business confidence over the next 12 months rose to a nine-month high during the month as firms predicted improvements in new orders as market conditions gradually normalise. We believe the optimism on the outlook for manufacturing sector could be attributed to recent news flow on possible Covid-19 vaccine, which may be made available in some countries next year, as well as latest economic indicators of improvement in China’s manufacturing sector.

China’s General Manufacturing PMI manufacturing sector expanded by 53.0 in September, only slightly lower from 53.1 in August, and remained in the expansionary region for the fifth straight month supported by higher new orders and export sales while staffing levels had stabilised. Similarly, the global manufacturing PMI rose to a 25-month high of 52.3 in September from 51.8 in August as output and new orders increased for the third consecutive month while new export business rose for the first time in more than two years.

Meanwhile, Asean manufacturing PMI fell to 48.3 in September from 49.0 in August due to the fall in output amid lower new orders. Among the Asean countries, only Philippines and Vietnam registered readings above 50 level, at 50.1 and 52.2 respectively, while Thailand (49.9), Singapore (48.0), Indonesia (47.2) and Myanmar (35.9) remained below 50. We believe that the lower readings indicate some concerns of a second wave of infections and lockdown measures emerging. This may further weigh on the pace of recovery in the region’s economic growth.

Despite the fall in Malaysia’s manufacturing PMI in September, IHS Markit guided that this could be expected following the initial rebound. It further noted that historical comparison between PMI and GDP is still representative of growth in both manufacturing production and PMI, although to lesser extents compared to previous months. Going forward, we believe that the pace of recovery of the manufacturing sector will be partly supported by healthy demand for Malaysia’s electrical and electronic (E&E) products in line with global semiconductor sales which rose for the sixth consecutive month by 4.9% yoy in July (5.1% yoy in June). Besides that, we expect the upcoming Budget 2021 on November 6 will likely have measures to support producers, especially SMEs in the manufacturing sector. The Finance Minister recently guided that Budget 2021 will prioritise SMEs’ recovery through business resilience and sustainability. For the full year 2020, we maintain our GDP growth projection of -4.5% (+4.3% in 2019) which is at the mid-range of the official forecast between -3.5% and -5.5%, before rebounding to 6% projected for next year.

Source: Affin Hwang Research - 2 Oct 2020