Manufacturing PMI Fell to 48.5 in October

• Lower PMI was led by output and new orders which moderated further in October partly due to the reimposition of CMCO in some states
• New export orders also declined due to ongoing disruption to foreign demand caused by the pandemic
• For the full year 2020, we maintain our GDP growth projection of -5.0% (+4.3% in 2019) before rebounding to 6% projected for next year.

New Orders and Production Slowed Due to CMCO in October

Malaysia’s manufacturing Purchasing Managers Index (PMI) fell for the fourth consecutive month to 48.5 in October from 49.0 in September, decreasing below the 50-level expansionary level for the third month in a row. The continued deterioration in the country’s manufacturing PMI was due partly to lower new orders and production, which may be attributed to the reintroduction and extension of the Conditional Movement Control Order (CMCO) in Selangor, KL, Putrajaya and Sabah, effective from 14 October to 9 November. We believe the enforcement of CMCO in these states may have caused some scaling back in production, while new export orders also declined due to some trade disruption caused by the pandemic in the region. Besides that, there was a fall in backlogs of work due to lower new orders, which had resulted in a further fall in employment although the rate of job cuts had eased from the survey record in August. It was also noted that firms were reluctant to increase purchases and hold inventories due to weak demand from uncertain external environment, hence stocks of purchases and finished goods were depleted. In contrast, based on forward looking sentiment, manufacturers remained confident over the next 12 months despite easing from its nine-month high in September as firms predicted improvements in output with expectations of a recovery in market demand.

This optimism may be reflected in Malaysia’s exports to China, which rose sharply by 41.9% yoy in September (20.9% in August), supported by higher demand for iron and steel products, E&E products, palm oil and palm oil-based agriculture products. In particular, China’s General Manufacturing PMI manufacturing sector rose to 53.6 in October from 53.0 in September, its highest reading since January 2011, boosted by the increase in output and total new work despite the ease in new export sales. Meanwhile, among Asean countries, Thailand rose for the sixth consecutive month to 50.8 in October from 49.9 in September, its first reading above 50 since December 2019 supported by higher production and new orders. Meanwhile, in Indonesia, the PMI in October also increased to 47.8 from 47.2 in September, remaining in the contractionary region for the second month in a row due to a decline in output and new orders. We believe the Asean region’s manufacturing PMI will benefit from the recovery in China’s economy. Global Manufacturing PMI also rose to 53 in October from 52.4 in September at its highest level since May 2018.

Domestically, IHS Markit guided that the historical comparison between PMI and GDP suggests a sustained rise in GDP at the beginning of 4Q20. However, it noted that manufacturing output appears to be weakening in October after the implementation of CMCO in some states, which will continue to be the headwind for the manufacturing sector. There are concerns that if Covid-19 cases in our export markets also continue to rise, this will affect external demand for Malaysia’s manufactured output, which may drag the ongoing healthy demand for electrical and electronic (E&E) products. In 3Q20, based on the quarterly exports and production figures, we expect Malaysia’s real GDP growth to decline at a slower pace of about -2.5 to -3.0% yoy from -17.1% in 2Q20 (3Q20 GDP figures will be released on 13 November 2020). For the full year 2020, we maintain our real GDP growth projection of -5.0% (+4.3% in 2019) which is at the mid-range of the official projection between -3.5% and -5.5%, before rebounding to 6% projected for next year.

Source: Affin Hwang Research - 3 Nov 2020