OVERVIEW

• The Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) remained unchanged at 47.1 in December, marking its twenty-first consecutive month of contraction as indicated by the sub-50.0 reading.
• Both production and new orders extended their decline in December. In response, manufacturers sharply reduced their stocks of purchases in December.
• On a positive note, employment continued its gradual increase. Meanwhile, manufacturers raised their charges for the second month following the sharp depreciation of the ringgit, raising input prices significantly.
• We reiterate our view that the indicative slowdown in manufacturing would weigh down on GDP growth in 4Q16. Going forward, while we anticipate a further recovery in domestic demand to lend some support to the manufacturing sector, the volatile consumer spending and the uncertain global economic conditions might pose some downside risks to the growth in the sector.

The PMI reading remained unchanged at 47.1 in December, marking its twenty-first consecutive month of contraction as indicated by the sub-50.0 reading. Besides that, the index averaged 47.1 in 4Q16, which is markedly lower than the 48.0 reading registered in 3Q16. The tepid domestic economy and volatile external demand remain the factors that weighed down on the manufacturing sector.

The sub-groups of new orders, output, and stocks of purchases extended their decline in December. On a positive note, employment level rose for the fourth month though at a softer pace.

New orders continue its unabated decline in December. A slide in demand from both domestic and external front has led to the weak performance of new orders. In particular, new export orders fell at the sharpest rate in six months amidst stiff competition and weak global economy.

Production extended its downward trend in December in tandem with the fall in new orders. Manufacturers reported the uncertain economic conditions as the main reason behind the falling production. We believe it would be a long road ahead before the production could regain its recovery momentum and return to a stronger level.

New employment increased for the fourth month in December, though the pace of increase has started to ease. While the resilience in employment could reflect a lag effect, the persistent deterioration in manufacturing operating conditions might put a damper on the long term employment growth in the sector.

Stocks of purchases declined at a rate sharper than the 19-month average in December. In addition, input prices surged at the steepest rate in the series history mainly due to the sharp depreciation of the ringgit. Consequently, manufacturers raised the charges for their clients for the second consecutive month.

Solid global PMI performance. In contrast, the global PMI along with the index of most major economies showed strong and sustained manufacturing performance. The global PMI reading in December rose to 52.7 from 52.1 in November. Among world major economies, the Eurozone December PMI reading jumped to a more than five-year high of 54.9 in December from 53.7 in November. The Caixin China Manufacturing PMI also climbed to 51.9 from 50.9 in November. Similarly, Japan manufacturing sector expanded for the fourth month with its PMI reading recorded at 51.9 in December (November: 51.3).

The Baltic Dry Index (BDI) fell to 961 in December from 1204 in November. The Baltic Dry Index, which measures the transportation cost of raw materials, is a leading indicator of global trade, like the PMI. We believe the December weakness was heavily influenced by seasonal factors as the index usually peaks towards the end of the year from a low of around 300 earlier

Outlook

Improved outlook for 2017, downside risks remain. With the latest weak PMI data, we reiterate our view for an expected growth moderation in manufacturing output that would subsequently weigh on GDP growth in 4Q16. For this reason, we had, in November, revised down our 4Q16 GDP forecast to 4.3% from 4.7%. Going forward, we anticipate a further recovery in domestic demand to lend some support to the embattled manufacturing sector and lift its overall growth. Nevertheless, we see the volatile consumer spending constrained by high household debt and the uncertain global economic conditions to pose downside risks to the growth in manufacturing sector. We thus believe that any recovery in the manufacturing sector in 2017 would be gradual and modest at best. Hence, we project Malaysia’s GDP growth to nudge up slightly to 4.5% in 2017 from an estimated 4.2% last year.

Source: Kenanga Research - 4 Jan 2017