OVERVIEW

• PMI dips slightly below 50.0 as demand contracts. A decline in new orders and subdued demand conditions pushed Malaysia’s February Manufacturing Purchasing Managers’ Index (PMI) a tad below the 50.0 threshold, at 49.9 (Jan: 50.5). Generally, February PMI data was mixed reflecting a broadly stagnant manufacturing activity.
• Subdued external demand weighing on new orders. Weaker demand, particularly from the exports market weighed on new orders during the month, ending its preceding three months of successive growth.
• Employment growth rate slows as confidence wanes. Although still rising, firms raised their payroll numbers at a slower rate in February as business confidence dips.
• Marginal expansion in output was registered in February after the index stagnated for the first time in six months last month. However, the marginal rise in output suggests a near term lacklustre outlook for the sector.
• Softer Ringgit creates price pressures. Higher raw material prices created sharper inflationary pressure in February leading the rate of inflation to edge up from January’s 15-month low.
• Slower manufacturing activities seen ahead. February’s PMI contraction supports our view of the challenges facing the manufacturing sector for the year. While export orders dipped during the month, we expect external demand to continue supporting the local manufacturing sector on a moderate growth trend.

PMI contracts, manufacturing activities stagnates. Malaysia’s February manufacturing Purchasing Managers Index (PMI) dipped back to slightly below the 50.0 threshold at 49.9 following January’s expansion at 50.5. The January recovery came after December’s contraction at 49.9. February’s index declined following lower new orders and subdued demand conditions. The fall also reflected a broad stagnation in the operating conditions across the local goods-producing sector, further reinforcing our bleak outlook for the manufacturing sector in the short term.

Subdued external demand weighed on new orders. New orders were weaker during the month, weighed down by poor market demand, particularly from the external market. Markit reported that new export orders declined in February, thereby ending successive growth registered in the preceding three months. Consequently, poor new orders were a drag against other sub-indices, particularly the stocks of purchases. According to Markit, the respondents observed a fall in demand from key export markets, especially USA and Europe.

Employment growth rate slows as confidence fall. Firms raised their payroll numbers for the fourth consecutive month in February to reflect the greater production levels during the month. Albeit rising, the rate of employment growth eased to its weakest in the current sequence. The slower rate of employment growth corresponds with the drop in business confidence during the month which fell lower than the average recorded over five-and-a-half years of data collection, potentially reflecting the firms’ cautionary outlook of the short term. Nonetheless, the firms surveyed remained optimistic of the 12-month production outlook as they expect underlying demand to improve moving forward.

Marginal expansion in output. Despite the pessimistic picture from the new orders index, February’s production returned to expansion after stagnating for the first time in six months in January. However, while firms associated the higher output with improved economic conditions, the expansion was only marginal during the month.

Softer Ringgit creates price pressure. Higher raw material prices created sharper inflationary pressure in February as the rate of inflation picked up from January’s 15-month low. The higher prices followed a mild depreciation of the currency against the USD during the month. In line with anecdotal evidence, currency weakness tends to result in higher raw material prices. Consequently, manufacturers passed on the higher costs over to their customers through higher output charges. However, Markit highlighted that output charge inflation was only marginal as the price-sensitivity of customers prevented the firms from fully passing on the higher costs to them.

Mixed PMI across the region. The ASEAN PMI will not be released before March 5 as data for some of the ASEAN economies continue to trickle in, most notably from that of Thailand and Singapore. Among ASEAN economies with released PMI data, Philippines reported a drop at 50.8 (Jan: 51.7) while PMI for Indonesia and the Vietnam grew marginally at 51.4 and 53.5 respectively (Jan: 49.9 and 53.4 respectively). Elsewhere, PMI for the US expanded for the third month at 55.9 (Jan: 55.5), while in China it rose slightly to 51.6 (Jan: 51.5), a six month high.

OUTLOOK

Slower manufacturing activities seen ahead. The slight fall in PMI performance in February supports our view for a slower manufacturing sector growth ahead. The contraction in new orders and slower increases in output and payroll numbers suggests a more moderate growth for the manufacturing sector in the coming months. Furthermore, December’s 14-month low exports growth would likely weigh on the local manufacturing sector’s growth trajectory. This is also in line with our slower GDP growth forecast for 1Q18 at 5.7% from 5.9% recorded in 4Q17. Nonetheless, we expect trade to remain as the key support driving manufacturing activities for the year albeit at a slower rate compared to last year’s rapid pace.

Source: Kenanga Research - 2 Mar 2018