OVERVIEW

• An optimistic start. The January Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) kicked off the year with a more upbeat reading of 48.6 (December: 47.1).

• Production and new orders stumble. Like the headline index, the production and new orders sub-indices deteriorated though at a slower pace than December. While this may not necessarily herald recovery, the slower pace of decline suggests that these factors have bottomed out.

• Ringgit a factor. Notwithstanding the decline in new orders, new export orders actually increased marginally, in part from the weaknesses in the ringgit. However, on the flip side, this has resulted in higher cost pressures for respondents.

• A good start for 2017. While January’s PMI continues to deteriorate, the slower pace of deterioration does suggest that there is some momentum for recovery, particularly for Malaysia’s manufacturing sector for 2017. We expect this to drive a slight upturn in GDP to 4.4% for 1Q17 from our estimated 4.3% for 4Q16.

Bottoming out? The worst may well be over for Malaysia’s manufacturing sector as the manufacturing PMI declined at its slowest pace at 48.6 in January from 47.1 in December, hitting its 4 month high. While this remains below the 50.0 threshold, the slower place of deterioration, along with the more buoyant data from Malaysia’s regional peers bode well for Malaysia’s manufacturing sector.

Sub-indices largely trending up. Production and new orders sub-indices continued to see sub-50 reading in January though the panel notes that the deterioration in these sub-indices have slowed. Employmnent, however, remained positive for the fifth consecutive month.

Silver lining in new orders. New orders declined at a slower pace though interestingly, this was largely driven by a fall in domestic demand. Indeed, international demand rose slightly during the month. New export orders rose as weaknesses in the ringgit has helped provide some support to international demand. However, the level of support from the ringgit weaknesses was marginal with only a slight expansion in new orders. Nevertheless, this was the first time in eight months that new export orders have increased and suggests a more encouraging outlook.

Slower fall in production. Lack of new work inflows and subdued demand conditions have resulted in the continued fall in production though at a slower pace. Production declined at the softest pace in over one and a half year, lending credence to the idea of a manufacturing sector turnaround.

New employment grew for fifth consecutive month. New employments continued to see positive readings for the fifth consecutive month.though at a slower pace than that of November’s high. Despite a slight moderation in new employment growth, this supports a more positive outlook for 2017. This is supported by the newly launched Future Output Index which signalled greater confidence, at least for the start of 2017.

Weak ringgit weighing against costs. While the ringgit weakening has been somewhat positive for new export orders, on the flip side, this has likewise placed greater cost burden on input prices, resulting in input prices rising at the highest rate in the series’ history. This has led to sharper increase in prices charged.

Global outlook positive. Elsewhere, the global PMI rose at the same rate of 52.7 relative to December 2016 as the sub-indices recorded across-the-board improvements, suggesting significant global recovery momentum underway. The US and Euro Area saw their respective indices growing at a faster pace in January at 55.0 (December: 54.3) and 55.2 (December: 54.9). Back in Asia, Japan’s headline PMI stood at 52.7 in January, up from 52.4 in December though South Korea’s PMI deteriorated to 49.0 in January, down from 49.4 in December. Closer to home, Philippines posted a strong PMI reading at 52.7, though this was significantly lower than December’s 55.7. Indonesia, meanwhile, crossed the threshold with a PMI reading of 50.4 from 49.0 in December.

Seasonal declines in Baltic Dry Index. The Baltic Dry Index fell to 800 points in January from 961 in December, largely owing to seasonal factors though inclement weather conditions and supply bottlenecks have sustained the index somewhat – this may translate into a sharper rally post-Chinese New Year as the lull in demand expires.

OUTLOOK

Optimistic data suggests possible turnaround. The possible bottoming out of the PMI suggests that Malaysia may be seeing a momentum build up in its cyclical recovery. Improvements in its new export order explicably points to growing support from the external sector even as the manufacturing sector sees a gradual recovery due to support from domestic demand. We are somewhat bullish on Malaysia’s prospects and hence expect a slight upturn in GDP to 4.4% for 1Q17 from our estimated 4.3% for 4Q16.

Source: Kenanga Research - 3 Feb 2017