OVERVIEW

The latest reading of the Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) showed continued worsening in operating conditions for the manufacturing sector, albeit at a slower rate. September headline PMI stood at 48.3, signifying a slower rate of contraction from 47.2 in August. Nevertheless, the index remained under the 50.0 level that separates expansion from contraction for the sixth month in a row. The 3Q15 quarter has the lowest quarterly average reading since the data was collected. Manufacturers scaled back on their production due to lackluster new orders and unfavorable economic conditions. The CEIC leading indicator also pointed to deteriorating economic conditions. It will prove to be a hurdle for the manufacturing sector to recover in 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 September PMI reading of 48.3 marked the sixth consecutive month of contraction in manufacturing activity. A reading below the 50.0 level indicates contraction in activity.
• Poor sentiment towards domestic economy, continued depreciation of the ringgit against world major currencies, and waning domestic demand affected by Goods and Services Tax (GST) implementation in April likely contributed to the weak PMI reading.
• Among the sub-groups, new orders, output and stocks of purchases saw declines in September, albeit at a slower rate compared to August. Production still declined at a rate above the long run average of the series. This contributed to the weak PMI reading of 48.3 in September, which is lower than the average index reading of 50.0 at least in the past three years.
• New orders suffered the seventh month of decline in September. On the contrary, new export orders pulled up the best performance, registering growth in September. Solid foreign demand has helped improve export orders performance, but the slow growth in export orders are likely caused by the global economic slowdown.
• Improving demand from overseas likely helped to support employment. Despite a fall in production, employment unexpectedly increased in September, the first increase since April. The increase was reported to be modest.
• Following lower new orders and production, stock of purchases fell further in September. Manufacturers also faced inflationary pressure in their purchases, due to recent ringgit woes. This led to increasing charges as manufacturers tried to offload their rising cost burden.
• Markit Global PMI has managed to stay in expansion territory since December 2012. Among major economies, Japan PMI shows manufacturing maintaining the fifth consecutive month of expansion. Eurozone has enjoyed continued manufacturing growth but at a slower rate. Meanwhile, Caixin China Manufacturing PMI shows seven months of manufacturing contraction as the
• Chinese economy cools down.

Outlook

• September Manufacturing PMI indicates a slower rate of deterioration in the manufacturing sector. However, the challenging domestic and worldwide economic conditions present a high hurdle for a recovery in coming months. An analysis of available Malaysia PMI data beginning July 2012 shows Malaysia PMI having a positive correlation with manufacturing output growth and manufactured goods export growth.
• We thus see the manufacturing contraction as indicated by PMI to be a sign of downward pressure to the country’s GDP growth in the 2H15. Nevertheless the slowdown in manufacturing output is in line with expectations of moderating GDP growth and widely expected slowdown of the exports of electrical & electronics (E&E) this year. Expectation of improvement in services, construction, mining and agriculture sectors would mitigate any shortfall from manufacturing’s contribution to GDP growth. At this stage the worsening of PMI readings do not warrant a revision to our GDP forecast.
• The CEIC Malaysia Leading Index also points to a bleak outlook for Malaysia manufacturing sector. The CEIC index has fallen to 83.1 in August. This supports our expectation of contraction in the coming months.

Source: Kenanga Research - 2 Oct 2015