• Further descent. The Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) plunged to a record low of 46.9 in June (May: 48.7). This extends Malaysia’s sub-50 reading for the second month.

• Sharper deterioration in output and new orders. Both output and new orders declined at a faster rate, continuing from the pessimistic thread of May’s PMI. Anecdotal evidence suggests weaknesses in underlying demand and a possible growth slowdown in the horizon.

• Prices pressures continue to ease as concerns on exchange rate volatility and raw material costs were less prevalent.

• Stagnant employment. Employment figures were broadly flat in June. This came after May’s PMI report painted a more upbeat picture of modest job creation in the manufacturing sector.

• Possible tapering in manufacturing sector. June’s weaker PMI reading is in line with our expectations that manufacturing sector growth is likely to ease starting from the second quarter onwards. However, we remain somewhat optimistic that manufacturing sector growth would remain elevated, relative to the previous year. We expect the manufacturing IPI to remain above 5.0% for 2Q17 but lower than 1Q17’s 5.6% and 4.7% for 2017 (2016: 4.3%)

An unexpected trough. Malaysia’s manufacturing PMI fell to 46.9 (May: 48.7), its lowest point since the inception of the PMI’s five year history. The deterioration in June’s PMI was the second consecutive month of PMI decline. Previously, PMI improved for four consecutive months from January, breaking the 50.0 threshold for in April. Prior to April, the PMI was last above the 50.0 threshold in March 2015. June’s reading brings the average 2Q17 PMI to 48.8 (1Q17: 49.2).

Output and new orders saw sharper declines. Weak demand weighed on both output and new orders as both components saw speedier deterioration relative to May. Indeed, the decline in production was the fastest since June 2016; new works likewise declined by the most since the end of 2016. In addition to the downturn in demand weighing against production, anecdotal accounts also suggests a possible economic slowdown in the horizon. On the bright side, the panellists reported an uptick in exports in June with new orders abroad increasing for the second time in three months, particularly from China, Vietnam and India.

Falling purchasing activity. In line with weaker demand and the associated fall in output, purchasing activity likewise fell in June even as firms sought to streamline stocks. Purchasing activity and unfinished inventory levels fell at survey-record rates. Inventories of finished goods likewise declined, consistent with the growing pessimism that characterised 2Q17.

Employment stagnating. Topping off the relatively bleak overview of the manufacturing sector, employment numbers were flat overall. Some panellists reported that many of their foreign workers have returned to their home country. This coincides with the expiration of the final deadline for registering illegal foreign workers. Separately, the backlog of work also fell, consistent with the decline in new businesses though Markit notes that the decline was only moderate.

Receding cost and price pressures. Price pressures have taken a backseat amid slower inflationary pressures and sharper deterioration in business conditions. Markit saw a marked reduction in reports of exchange rate volatility and higher costs of raw materials weighing in, relative to the preceding month. This likely led to a slower increase in the corresponding output prices. However, as with the previous month, Markit notes that cost and price inflation remains above their historical averages. These finding are consistent with the substantially reduced exchange rate volatility, the strengthening of the ringgit (relative to the beginning of the year) and lower inflation (relative to 1Q17).

Continued optimism amid present pessimism. Despite the bleak “now-casting” of June’s manufacturing sector, Markit notes that the respondents remain somewhat upbeat on future prospects. The Markit’s Future Output Index was above its average (based on data compiled since the beginning of 2016) with respondents largely attributing optimism on hopes of improving demand.

Stagnant ASEAN PMI. Regionally, Malaysia was the worst performer among the seven countries covered by the Nikkei ASEAN manufacturing PMI. The index teetered on the 50.0 threshold (May: 50.5), enjoying marginal support from new orders and employment. However, there were some stagnation in output growth and reports of countries struggling to sustain growth momentum. This led to a corresponding decline in purchasing activity as manufacturers weigh in on soft demand. Apart from Malaysia, Indonesia (49.5) and Myanmar (49.4), four out of the seven ASEAN economies reported reading above 50.0. Philippines remained the strongest performing ASEAN economy with a reading of 53.9 followed by Vietnam (52.5), Thailand (50.4) and Singapore (50.3).

Comparatively sanguine outlook globally. Moving out of ASEAN, the global PMI stood at 52.6, unchanged from May and well above the 50.0 threshold. This comes as most major economies likewise reported above-50.0 reading in June, including the Eurozone (Jun: 57.3; May: 57.0), US (Jun: 52.0; May: 52.7), China (Jun: 50.4; May: 49.6) and Japan (Jun: 52.4; May: 53.1). While these reading were somewhat lower for most of these economies, with the exception of China which clawed back above the 50.0 mark, these numbers suggests a continuous of the synchronous global growth narrative.

OUTLOOK

Tapering 2Q17. Combined, June’s PMI figures suggest a more moderate 2Q17 growth as a slowing manufacturing sector weighs against the headline GDP. On the balance, we are more sanguine on the overall outlook for the manufacturing IPI, which we anticipate to remain above 5.0% for 2Q17 but lower than 1Q17’s 5.6%. This will culminate in a slightly slower GDP growth of 5.4% in 2Q17 (1Q17: 5.6%).

Support from synchronous global growth. We are more positive on synchronous global growth sustaining the manufacturing sector via external demand. This is consistent with Markit’s finding of modest improvements in new orders abroad. The narratives of improving global growth is also reinforced by most major economies seeing PMI reading above the 50.0-mark, albeit at a slightly lower level.

Cost pressures a receding concern. The relative appreciation of the ringgit and easing inflation trends meant that cost concerns have become a less prominent feature of panellists’ comments. The ringgit also broadly improved in June at MYR4.277/USD (May: MYR4.314/USD). However, price stickiness mean that some of these adjustments will likely be more subdued. May’s PPI growth saw a mild uptick at 8.0% (Apr: 7.5%) YoY, supporting the hypothesis that price adjustments will likely be gradual. However, we believe that the pass-through effect to output price will thereafter be relatively quick.

Source: Kenanga Research - 4 Jul 2017