OVERVIEW

• The November Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) edged down to 47.1 from 47.2 in October indicating continued deterioration in operating condition for the manufacturing sector.
• Production continued to fall, while new orders stumbled at the steepest rate in the series history. As a result, manufacturers reduced their stocks of purchases at the fastest pace in seven months.
• Employment unexpectedly strengthened at the quickest pace in more than a year despite the worsening operating conditions. On the other hand, manufacturers faced with rising cost pressure amidst ringgit depreciation and higher labour costs raised the charges on their clients.
• The lacklustre manufacturing operating conditions as reflected in the latest PMI data reinforce our view of a muted outlook for Malaysia’s manufacturing sector in 4Q16. We expect a growth moderation in manufacturing to weigh on GDP growth in 4Q16. Hence, we had revised down our 4Q16 GDP forecast to 4.3% from 4.7%.

The PMI reading edged down to 47.1 in November from 47.2 in October, a five-month low as well as its twentieth consecutive month of contraction as indicated by the sub- 50.0 reading. The manufacturing sector has been suffering unrelenting downward pressure from the tepid domestic economy and weak external demand.

The sub-groups of new orders, output, and stocks of purchases stayed on downward trend in November. However, employment level surprisingly increased despite the unfavourable operating environment.

New orders extended its fall in November. In a worrying sign, new orders stumbled at the steepest rate since the series started about four years ago. Weak sales from lack of new product initiatives together with falling export orders are attributable to the unimpressive new orders performance.

Production declined for the twentieth consecutive month in November following the contraction in new orders. Lacklustre demand and unfavorable economic conditions remain the main barriers for the recovery in production level. We continue to believe the prolonged slump in production will pose some threat to the long term competitiveness of the manufacturing sector.

New employment was surprisingly strong in November, increasing at the quickest pace in more than a year despite the worsening operating conditions. The resilience in employment might suggest that manufacturers are still relatively upbeat about the longer term outlook of the manufacturing industry. However, it may also reflect a lag effect.

Stocks of purchases contracted in November at the fastest pace in seven months, consistent with the falling production. Meanwhile, manufacturers faced rising cost pressure amidst ringgit depreciation and higher labour costs. In response, manufacturers raised the charges for their clients.

Steady global PMI performance. The global PMI reading in November remained steady at 52.1 (October: 52.0) in a sign of solid recovery in the global manufacturing sector. Among world major economies, the Eurozone November PMI reading improved to 53.7 from 53.5 in October. The Caixin China Manufacturing PMI moderated slightly to 50.9 from 51.2 in October, but still staying well within the expansion mode. Similarly, Japan manufacturing sector expanded for the third month with its PMI reading of 51.3 in November.

The Baltic Dry Index (BDI) rebounded to 1,204 in November from a reading of 857 in October. The Baltic Dry Index, which measures the transportation cost of raw materials, like the PMI, is a leading indicator of global trade. The surge in BDI follows the expectations of US infrastructure spending boom and increased demand for dry bulk commodities. A sustained recovery in global manufacturing and trade activities could support the demand for domestic manufactured products and underpin the recovery of local manufacturing sector.

Outlook

Weak manufacturing sector to weigh on GDP growth. The lacklustre manufacturing operating conditions as indicated by the latest PMI data reinforce our view of a muted outlook for Malaysia’s manufacturing sector in 4Q16. With the manufacturing sector still facing substantial downward pressure from a weak external demand amidst rising global economic uncertainty, we see a long and bumpy road ahead before the manufacturing sector can fully regain its recovery momentum. We expect a growth moderation in manufacturing to weigh on GDP growth in 4Q16. As a result, we had revised down our 4Q16 GDP forecast to 4.3% from 4.7%.

Source: Kenanga Research - 2 Dec 2016