OVERVIEW

● Malaysia’s Purchasing Managers Index (PMI) recovered from its preceding four months of deterioration, inching closer to the 50.0 threshold line at 49.5 in June (May: 47.6). The month’s PMI was lifted by slower deterioration in output and new orders. According to IHS Markit’s report, the month’s deterioration in business conditions marked the weakest since March.

● However, output and new orders remained on a decline during the month, albeit at a slower pace. Subdued demand, particularly from the international markets continued to weigh on the new businesses leading to the fifth consecutive month of decline in June. Nonetheless, the rate of decline eased to the slowest since March. Similarly, output declined during the month on discouraging economic conditions. Reflecting the weak external demand, new export orders declined in June.

● Nonetheless, firms marginally renewed the expansion of payroll numbers after the preceding month’s reduction. Moreover, price pressures started to ease as input cost inflation eased for the third consecutive month, registering the weakest inflation level since March 2015. While input cost inflation eased to its lowest in 41 months mainly due to the impact of the zero-rating of the Goods and Services Tax (GST) it could also result in lower overall headline inflation for the coming months. As there was no change in average selling prices, that puts an end to the 19 straight months of output inflation.

● While the month’s higher employment number may suggest renewed confidence, the firms were still discouraged from engaging in input buying as demand conditions remain weak. According to IHS Markit, level of business confidence fell to the lowest since October 2017.

● Regional manufacturing conditions appear to have lost its momentum in June on the back of ensuing trade war tensions. The Nikkei Asean Purchasing Managers Index slipped to 51.0 in June (May: 51.4). Manufacturing PMI across neighbouring Thailand and Indonesia moderated to 50.2 and 50.3 respectively during the month (May: 51.1, 51.7). Meanwhile, lower exports orders weighed on China’s PMI which slipped to 51.0 in June from May’s 51.1. On the other hand, while Japan’s PMI improved to 53.0 (May: 52.8), it also registered lower export orders.

● As President Trump’s tariff threat on Chinese imports escalates coupled with retaliations by US key allies on steel and aluminium tax, along with the end of the extended tech up cycle, we project global trade to moderate further in 2018. Nonetheless, we expect domestic demand to bolster growth of the manufacturing sector for the coming months as the zero-rating of the GST gradually starts easing price pressures and improve consumer sentiments. This would help support GDP growth in the 2Q18 which we estimate at 5.3%, a tad lower than the 5.4% registered in 1Q18. We expect GDP growth to slow further in the 2H18, bringing our full year growth forecast of 5.1% compared to 5.9% in 2017. Combined with the removal of the GST, which would help to lower inflation in the 2H18, it would leave more room for BNM to keep the Overnight Policy Rate at 3.25%.

Source: Kenanga Research - 3 Jul 2018