The latest reading of the Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) showed further deterioration in operating conditions for the domestic manufacturing sector. August headline PMI was reported at 47.2, a 34-month low and well under the 50.0 mark that separates expansion from contraction for the fifth month in a row. Factories cut back on new orders for the sixth month running with repercussions for production and purchasing activity. When read together with other leading indicators for the Malaysian economy published by the Department of Statistics and CEIC, the latest PMI reading points to worsening business sentiment that could mean continued moderation of manufacturing output in the coming months.

• The Nikkei Malaysia Manufacturing PMI is a new leading indicator published by Markit beginning July 2015. It is a composite of five measures of manufacturing performance, namely new orders, output, employment, suppliers’ delivery times and stocks of purchases.
• The August reading for the PMI at 47.2 was the lowest in 34 months and marked the fifth consecutive month of contraction in manufacturing activity as indicated by the under 50.0 reading. The 50.0 level separates expansion from contraction.
• Poor domestic demand from a slowdown in private consumption immediately following Goods and Services Tax (GST) implementation in April and similarly poor external demand from slowing growth in China and neighboring economies likely led to the unfavorable August PMI reading.
• All five measures of manufacturing performance making up the PMI saw deterioration in August. Among the five areas surveyed, production, new orders and stocks of purchases suffered the steepest rate of decline.
• New orders suffered the second-steepest rate of decline since mid-2012. August also marked the sixth consecutive month in which new orders have fallen. On the contrary, new export orders were able to maintain
• the same pace as in July. Strong foreign demand has contributed to the export orders performance, but the upside trend was limited by unfavourable exchange rates.
• The decline in new orders led to a fall in production. August production experienced a similar rate of decline from June, when output fell at the fastest rate in 32-months. As a result, manufacturers reduced their staffing level for the third consecutive month.
• Buying activity in August experienced a steepest contraction. The volume of pre-production items also fell due to companies’ attempts to reduce holding of stock during times of high uncertainty.
• Manufacturers suffered increasing purchase costs due to the weak local currency pushing up raw material costs. In August, manufacturers faced higher in inflation. Manufacturers passed these costs on to clients in the form of higher charges.
• Markit Global PMI has managed to stay in expansion territory since December 2012. Among major economies, Japan PMI shows manufacturing has been expanding for the fourth consecutive month. Eurozone has maintained an impressive run of expansion since July 2013. Meanwhile, China has suffered six months of manufacturing contraction as indicated by the Caixin China Manufacturing PMI.

Source: Kenanga Research - 2 Sep 2015