OVERVIEW

• The Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) stumbled in October, as the rebound in September reading prove to be short-lived. The October reading fell to a four-month low of 47.2 from 48.6 in September.
• Both production and new orders declined at a sharper rate following uncertain economic conditions and weakening global demand. Consequently, manufacturers reduced their stocks of purchases at the fastest pace in four months.
• On a positive note, employment increased in spite of the worsening manufacturing conditions. Meanwhile, input prices experienced the smallest increase in fifteen months. In response, manufacturers reduced charges for the first time in nearly two years.
• With the latest unfavourable manufacturing sector conditions shown by the PMI data, we see muted outlook for Malaysia’s manufacturing sector in 4Q16. Although domestic demand may gradually recover in 4Q16, we believe it remains a challenge for the hard-hit manufacturing sector to stage a quick rebound in the near term.
• The prolonged slump in the manufacturing sector could pose some downside risk to the economic growth in 4Q16. However, we expect GDP growth for the whole of 2016 to comfortably stay within our forecast range of 4.0%-4.5%.

The PMI reading stumbled to 47.2 in October from 48.6 in September and the lowest since June. It was the nineteenth consecutive month of contraction in manufacturing activity as indicated by the sub-50.0 reading. The manufacturing sector has been facing tremendous challenges from the slowing domestic economy and volatile external demand.

The sub-groups of new orders, output, and stocks of purchases extended their downward trend in October. On a positive note, employment rose despite the weakness across the other sub-groups.

New orders continued to slow in October, staying on a downward trend that has lasted for more than a year. Adding to the manufacturers’ worries, new orders fell at the sharpest rate in eleven months. The decline in foreign demand was partly a factor behind the poor new orders performance.

Production contracted at a sharper rate in October in tandem with declining new orders. Businesses again cited unfavorable economic conditions and lackluster demand as the main reasons behind the drop in production. A prolonged slump in production will likely be detrimental to the long term competitiveness and development of the manufacturing sector.

The employment trend remained surprisingly resilient in October, rising for the second month despite the tough operating environment. However, the solid performance of employment may prove unsustainable if operating conditions continue to deteriorate in the coming months.

Stocks of purchases fell in October at the quickest pace in four months. Concurrently, pre-production inventories were depleted at the largest scale in more than a year. Meanwhile, input prices experienced the smallest increase in fifteen months. In response, manufacturers reduced charges for the first time in nearly two years.

Sound global PMI performance. The PMI among world major economies continued to suggest a credible trend of recovery in the global manufacturing sector. The Eurozone managed to extend its robust manufacturing growth with an October PMI reading of 53.3. The Caixin China Manufacturing PMI jumped to 51.2 from 50.1 in September, staying comfortably in the expansion mode. Furthermore, Japan manufacturing sector expanded further with its PMI reading registered at 51.4 in October.

The Baltic Dry Index (BDI) edged down to 857 in October from a reading of 875 in September. The Baltic Dry Index, which measures the transportation cost of raw materials, like the PMI, is a leading indicator of global trade. The BDI may start to moderate soon as winter months approach. We shall closely observe the BDI trend in the coming months, as a sustainable breakout from the lowest readings of around 300 recorded in the earlier part of the year might be indicative of an incipient recovery in global manufacturing trade activities.

Outlook

Muted 4Q16 outlook. With the latest unfavourable manufacturing sector conditions shown by the PMI data, we see muted outlook for Malaysia’s manufacturing sector in the remaining months of 4Q16. The manufacturing sector still faces headwinds from a tepid demand on both domestic and global front. Although domestic demand may gradually recover in 4Q16, we believe it will remain a challenge for the hard-hit manufacturing sector to stage a quick rebound in the near term.

Downward pressure on GDP remains manageable. The prolonged slump in the manufacturing sector as indicated by the PMI data could pose some downside risk to the economic growth in 4Q16. However, we believe it would merely translate into a slight moderation in the manufacturing contribution to GDP growth. Combined with a lower base along with a relatively stronger services sector and the multiplier effect from the ongoing big infrastructure projects, we expect GDP growth for the whole of 2016 to comfortably stay within our forecast range of 4.0%-4.5%.

Source: Kenanga Research - 2 Nov 2016