OVERVIEW

• Malaysia’s manufacturing condition declined for the fourth month in May as poor demand dragged the Purchasing Managers Index (PMI) to 47.6 (Apr: 48.6), the lowest in 11 months. According to IHS Markit report, new businesses fell by the sharpest level since December 2016 following poor domestic and external demand.
• While new export orders declined for the fourth straight month in May, the decline was the weakest in three months, signalling the possibility that there could possibly be a short modest recovery in the current downcycle.
• As poor demand conditions called for cost-cutting measures, manufacturers reduced their payroll number for the first time in seven months. Similarly, manufacturers also held off from purchasing activities. Meanwhile, backlogs continued to fall as lower volume of new work provided ample time for manufacturers to clear up unfinished orders.
• Markit observed that manufacturers continued to face higher input prices in May due to a general increase in raw material prices, especially oil and metals. Though input prices have been on the rise since February 2015, input cost inflation eased to the slowest since October 2016. As a result, May output charge inflation eased from April’s sevenmonth high though average prices charged by manufacturers continue to rise, a trend observed since November 2016.
• Despite weak manufacturing activity in May, the change in the Malaysian government lifted sentiments and manufacturers’ optimism. As a result, business sentiments sustained above historical average and manufacturers retained a strong output projection in 2018.
• Elsewhere, manufacturing growth in major economies cooled off in May and could deteriorate due to risk of spill over from trade skirmishes between US and its major trading partners. Markit reported that US manufacturing conditions slowed to 56.4 (Apr: 56.5) while Eurozone moderated to 55.5 (Apr: 56.2), the lowest since March 2017. Japan’s PMI also eased to 52.8 (Apr: 53.8) while Taiwan’s PMI edged off to 53.4 (Apr: 54.8) in May.
• On the back of deteriorating PMI conditions, we remain cautious of the outlook for the domestic manufacturing sector. We see escalating trade tensions between the US and other key economies as well as weaker manufacturing output in major hi-tech producers including, Japan and Taiwan as signals of weakening external demand. Along with the review of major infrastructure projects and adjustments made to rehabilitate the burgeoning government debt, we have revised our growth forecast to 5.1% for 2018, slightly lower than our initial 5.5% projection. Nonetheless, we are hopeful that various efforts by the new government to uplift social well-being and reduce cost of living including the removal of the Goods and Services Tax will boost domestic consumption. This would bode well for local manufacturing conditions and partly mitigate the slowing external demand.

Source: Kenanga Research - 5 Jun 2018