• Return of optimism. Malaysia’s Manufacturing Purchasing Managers’ Index (PMI) saw a sharp improvement to 50.4 (Jul: 48.3), crossing the 50.0 neutral threshold. This was its first reading above 50.0 since April this year.
• Export orders boost higher output. Improvements in output helped drive the index in August though new orders continued to disappoint. However, output growth was supported by buoyant export orders. Nevertheless, in the absence of new orders, respondents appear to be wary on purchasing activity, opting for an inventory drawdown.
• Positive on long term prospects. Optimism on prospects for the coming 12 months stood at its highest level since December 2013 with respondents anticipating an eventual improvement in new orders.
• Divergence in input and output price. While input price eased to its weakest rate since October 2016, respondents opted for margin protection in light of higher costs for some raw material. This raised output prices at a slightly faster rate than July.
• Domestic demand instrumental in sustaining growth. August’s PMI suggests that while export orders helped raise output, with overall new orders remaining weak – likely from domestic factors – an improvement in domestic new orders will be instrumental in leading a more sustainable growth outlook for Malaysia, especially when global trade flows stutters. This would be supportive to enable GDP growth this year to remain above 5.0% (2016: 4.2%)

A sudden return to optimism. Malaysia’s manufacturing PMI shot up to 50.4 (Jul: 48.3) after three consecutive months of sub-50 reading. This was also its first reading above the 50.0 threshold after it last achieved a PMI reading of 50.7 in April.

Improved output driving the index. Improvements in manufacturing output help buoy the headline PMI reading up. Manufacturing output rose by the fastest rate since February.

New orders still weak. Notwithstanding improvements in output, order books remained relatively weak. However, there were some cheers as despite the decline in order books the contraction rate was its slowest since May. Weaker deterioration in order books was also attributable to improving export orders which rose after a marginal decline in July. Respondents noted that this was attributed to growing demand from China, Southeast Asia and the Middle East.

Purchasing activity underwhelms. Notwithstanding rising output, purchasing activity fell for the fourth consecutive month, likely because of continued weakness in new orders, This led to firms drawing down existing stock of raw materials. The stock of finished goods likewise declined, albeit at the slowest rate of its five consecutive month of contraction.

Continued expansion in employment. Hiring continued to improve with respondents pointing to a more bullish outlook ahead. This, along with the improvements in output, saw a reduction in outstanding business – particularly as new orders remained disappointing – while backlog of work declined for the third consecutive month.

Price pressure eases. On the price end, input prices eased significantly to a 10-month low, as inflation fell for the sixth straight month. However, this did not translate into an improvement in selling prices which rose instead at a slightly faster rate than that of July. Respondents attributed the divergence of input and output prices to margin protection as some raw material costs remained. Despite the increase in output prices, inflation was well below the 2017 averages, though likely elevated by historical standards.

A brighter outlook. Continuing from last month’s theme, the respondents’ assessment of the coming 12 months approached its highest level since December 2013 with respondents anticipating the possibility of higher production and exports, possibly driving future business conditions as new orders starts improving.

ASEAN PMI likewise rebounds to growth. After spending one month below the 50.0 threshold with July’s 49.3 reading (Jun: 50.0), the Nikkei ASEAN Manufacturing Purchasing Managers’ Index rose to 50.4. This marks a marginal improvement in ASEAN manufacturing conditions with five out of seven ASEAN countries covered by Nikkei reporting an upturn (Jul: two out of seven countries reporting above-50 reading). August’s figure was also a pleasant surprise after the ASEAN PMI sank to its lowest reading in 9 months in July. The five countries reporting an upturn (ranked in descending order) are Vietnam (51.8), Singapore (51.0), Indonesia (50.7), Philippines (50.6) and Malaysia; these countries also reported a faster pace of improvement relative to July. Thailand (49.5) and Myanmar (49.3) were the only two countries reporting deterioration. The improvement in ASEAN outlooks was partially driven by signs of improving domestic and external demand of manufactured goods providing a boost to production levels. However, Markit warns of the decline in manufacturing backlogs which remained a norm over the last three years which served as a damper on hiring across the region.

Global outlook upbeat. Similar to ASEAN, global PMI remained strong, indeed rising to a whopping 53.1 (Jul: 52.7) as PMI reported even, and indeed faster, growth among consumer, intermediate and investment goods categories. The more bullish overtones were reflected in improvements among major economies with Eurozone (Aug: 57.4; Jul: 56.6), the US (Aug: 52.8; Jul: 53.3), China (Aug: 51.6; Jul: 51.1) and Japan (Aug: 52.2; Jul: 52.1) seeing a more upbeat tone. For now, the global trend continues to support the theme of synchronous global growth, especially for the major economies.

OUTLOOK

Possible afterglow of 2Q17’s GDP figures. August’s sudden return to an upturn may reflect afterglow from its strong GDP numbers reported mid-August. Overall, however, we are slightly more cautious on August’s upturn representing an upsurge in manufacturing activity. Instead, we believe that August’s number merely represents a correction in the index after a threemonth divergence from fundamentals after Malaysia reported a stellar 3Q17 growth. Our view on manufacturing activity, moving into 3Q17, remains somewhat conservative. We expect manufacturing sector growth to ease somewhat in 3Q17 after a brisk 6.0% expansion in 2Q17.

Domestic demand poser. We are of agreement with Markit’s commentary that the continued weakness in domestic demand makes for a precarious growth scenario for Malaysia, especially if global growth stutters. Thus far, the 2Q17 GDP suggests that domestic demand may have lost some shine (2Q17:5.7% growth; 1Q17: 7.7%). A moderate growth in domestic demand may, in turn, hold back sustained improvements in output and hence, overall growth. This has translated to a more cautious purchasing activity which fell in August in favour of firms drawing down inventories instead.

Global tightening likely to cap global growth. While continued upbeat tone in the global PMI is welcome, the flipside of this optimism may come in the form of emboldening monetary authorities to commence their tightening cycles. Already, low unemployment rates, strong consumer inflation and rising inflation in the Euro Area is likely to tilt the European Central Bank (ECB) to trim quantitative easing before tightening their policy rates. While this may not necessarily portend the end of global growth, we are cautious if this would lead to a withdrawal of support to the ASEAN market and, by extension, the Malaysian economy particularly given the narrative of export orders being a major ingredient in Malaysia’s August upturn. While the timing of these major Central Banks’ tightening cycle remains fluid, for now, we do not expect the ECB tightening to begin before the end of 2017 while it evaluates the sustainability of its inflation barometers. We also believe that the odds of a third Fed rate hike in 2017 are somewhat remote given weak readings from the Fed’s inflation barometers. This window of continued easy money will help shore up some export demand for Malaysia in view of the still-tepid domestic new orders.

Cost pressures to make a comeback. While input prices have eased somewhat, with commodity prices seeing an uptick – oil prices, in particular, have seen some uptrend recently with Brent remaining above the USD50/barrel mark, though below the recent peak of USD54/barrel late-January to early March. Indeed, anecdotal account from respondents suggests that some higher raw material costs as their reason for increasing selling prices. However, in the long run, we expect that these cost pressures will smooth out in the absence of a repeat of an oil price rebound observed during 1Q17.

Source: Kenanga Research - 6 Sept 2017