OVERVIEW

• Manufacturing condition stumbled again for the third month in April as weak demand conditions continue to drag the Purchasing Managers Index below the 50.0 threshold. April PMI came in at 48.6 (Mar: 49.5), the lowest in six months. According to IHS Markit’s report, lower production requirements and subdued demand conditions led to the deterioration in manufacturing conditions, which exceeded the series trend.
• In particular, output and new orders declined at an accelerated pace during the month, reflecting lacklustre demand from both domestic and international markets on the back of ebbing economic growth. New orders contracted to the fastest pace since July 2017 while new export orders fell to the lowest since December 2016. The weaker demand conditions also dragged output for the second consecutive month to the lowest level since July 2017.
• Consequently, firms reduced their purchasing activities for the fifth consecutive month with both pre and postproduction inventories observing moderation during the month.
• Meanwhile, sharper input inflation continues to raise prices of output, extending the current period of inflation to 18 months. According to IHS Markit’s report, the latest rise in output inflation was the fastest since last September. However on a bright note, input inflation appears to soften as input cost inflation remained broadly in line with the historical average, albeit still rising sharply.
• Moreover, despite the overall softer manufacturing conditions, business sentiments surged to the highest in four-anda-half years as firms expect demand conditions to improve on the back of new projects. Consequently, firms continue to increase their hiring activities.
• Elsewhere, manufacturing conditions appear to have improved globally. The Global PMI across more than 40 countries rose to 53.5 in April (Mar: 53.3) following higher production and new orders. The US manufacturing conditions continue to improve and expanded for the second month to 56.5 (Mar: 55.6). Closer to home, Japan’s PMI edged higher to 53.8 (Mar: 53.1) while Philippines, Thailand and Vietnam simultaneously reported improvements in its manufacturing conditions. However, while China’s official Purchasing Managers' Index (PMI) eased to 51.4 in April (March: 51.5), its own private/Caixin PMI focusing on small/mid-sized companies came in above expectations at 51.1 (Mar: 51.0).
• However, we still see a dreary outlook for the domestic manufacturing sector as exports appear to remain weak over 1Q18. We also see the weaker April trade figures in hi-tech power houses, South Korea and Taiwan, as an indication that the global tech upcycle has reached its peak. Moreover, as heightened China-US trade tension persists, manufacturers in Asia as a whole could possibly scale back on its production as a precaution. Pending the outcome of the US-China trade talk and rising uncertainties on the back of the upcoming 14th General Election, we retain our growth forecast at 5.5% for the year 2018.

Source: Kenanga Research - 3 May 2018