Overview

• PMI barely contracts. Malaysia’s Manufacturing Purchasing Managers’ Index (PMI) reversed its uptrend and dipped barely below the 50.0 threshold in December (Nov: 52.0), pointing towards a stagnant manufacturing condition.
• Weaker new orders and purchasing activities. New orders declined in December on soft domestic demand, though new export orders strengthened for the second month, resulting in continued drawdown of inventories.
• Output and employment grew modestly. Manufacturers continued to increase production for the fifth month in December, albeit at a slower pace than the preceding month. Concurrently, hiring activities rose at a modest pace amidst sustained optimism among manufacturers.
• Price pressures remained elevated. Inflationary pressure for inputs remained sharp in December, prompting firms to pass on the rising costs to their customers.
• Wary of risks ahead. Key risks that could weigh on the sector throughout 2018 include softening domestic demand, rising financing cost induced by tighter monetary conditions, Employer Mandatory Commitment (EMC) levy implemented this year, stronger ringgit and a slowdown in external trade activities.
• Growth outlook remains promising but with limited upside. Nonetheless, the continued production and employment growth suggest sustained optimism among manufacturers. Moving into 2018, the expected boost from domestic demand coupled with synchronised global growth underpins a positive manufacturing outlook at least till first half of 2018 (1H18). But global growth uncertainty and higher base effect may pare down growth upside this year. Hence, we project GDP growth of 5.1% in 2018, moderating from our 2017 growth estimate of 5.8% but still within reasonable range of its potential growth trend.

PMI slightly below 50.0 threshold. Malaysia’s manufacturing Purchasing Managers Index (PMI) fell just below the 50.0 expansion line at 49.9 in December from a 43-month high of 52.0 in November. While the flattish December reading points to a more modest manufacturing condition than the upbeat performance seen in the preceding month, the manufacturing sector recovery has largely remained stable and intact. December’s number brings the 4Q17 average reading to 50.2 (3Q17: 49.5), the first quarterly expansion since first quarter of 2015 (1Q15).

New orders soften but external demand expands. New orders contracted in December after a brief expansion in the previous month, though the pace of decline was only marginal. The weak performance in new orders was influenced by soft domestic demand. On a positive note, the manufacturing sector saw continued growth momentum in external demand as new exports orders expanded for the second consecutive month. According to Markit’s report, panellists pointed to rising demand from key markets including Thailand and the Middle East. This is consistent with the vigorous uptrend in global economic and trade activities.

Modest production growth. Despite the weak new orders performance, manufacturers continued to increase production albeit at a slower pace than the preceding month. December marked the fifth consecutive month of expansion in the output sub-index, reflecting still-optimistic outlook for the sector. Indeed, businesses maintained a positive projection for output over the next twelve months supported by improving underlying demand conditions.

Employment up in December. Companies continued to increase hiring activities in response to higher production for the month. Nevertheless, the pace of job creation moderated in December. We continue to see the stable recovery in employment and production as a nascent signs of sustained growth momentum for the manufacturing industry.

Slowdown in purchasing activities. The weaknesses in new orders and overall demand led producers to reduce their purchasing activities for the month. Hence, firms saw a drawdown in pre-production inventories in December.

Price pressure remains high. Inflationary pressure for inputs remained sharp in December despite moderating somewhat from the preceding month. In general, firms observed an increase in raw material prices. Consequently, firms raised prices for their products in order to pass on the rising cost pressures to consumers. This will likely translate into some competitiveness erosion for producers if the current trend of rising inflationary pressure persists in the longer run.

Regional PMI mostly weaker. Much like Malaysia, regional economies mostly observed a dial back in their Manufacturing PMI in December. Countries that experience a moderation in December PMI include Indonesia (49.3; Nov: 50.4) and Philippines (54.2; Nov: 54.8). However, Vietnam manufacturing PMI surged to 52.5 from 51.4 in December. Notably, Vietnam manufacturing sector has stayed in expansion mode since Dec-15 as indicated by Markit’s PMI, signifying the emergence of the country as a prominent manufacturing powerhouse in recent years and increasingly a major competitor.

Sanguine global manufacturing prospect. Globally, the PMI rose to a near seven-year high of 54.5 in December (Nov: 54.1). The advanced market economies (AMEs) sustained vigorous expansion momentum in the manufacturing sector. Among them, the Eurozone PMI advanced further to a new high of 60.6 in December (Nov: 60.1); the US PMI jumped to 55.0 for the month (Nov: 53.9). Closer to home, China and Japan likewise registered a higher reading of 51.5 and 54.2 respectively (Nov: 50.8 and 53.6).

OUTLOOK

Key risks ahead. The somewhat flattish PMI performance in December aligns with our cautionary note that it might be premature to conclude that November’s PMI surge was sustainable. Indeed, we have identified several key risks that could weigh on the sector throughout 2018. On the domestic front, the decline in December new orders indicates that recovery in domestic demand remains fragile and vulnerable to seasonal factors and volatilities in global economic condition. Other risks include rising financing cost in the face of an expected tighter monetary condition in 2018, the Employer Mandatory Commitment (EMC) levy implemented this year and stronger ringgit that may pose downward pressure on the sector. Externally, we remain wary of the impact of a possible external trade slowdown on the recovery of local manufacturing sector.

Growth outlook remains promising but with limited upside. Notwithstanding overall tepid manufacturing conditions, the December PMI results point to a sustained optimism among manufacturers, as evident in the strength of continued production and employment growth. Moving into 2018, domestic demand is likely to improve further, supported by major infrastructure projects and increased private investment on the back of sustained external demand. Furthermore, the ongoing synchronised global growth would likely underpin a positive manufacturing outlook at least well into 1H18. We therefore anticipate manufacturing to hit a higher growth of 5.1% YoY in 1H18 before tapering off to 4.6% thereafter in 2H18. This is because global economic uncertainty and higher base effect may pare down growth upside this year. Hence, we project GDP growth of 5.1% in 2018, moderating from our 2017 growth estimate of 5.8% but still within reasonable range of its potential growth trend.

Source: Kenanga Research - 3 Jan 2018