OVERVIEW

● Malaysia’s Purchasing Managers Index (PMI) rose above the neutral 50-point level, indicating expansion, in August. The surprised higher PMI at 51.2 (July: 49.7) was due to faster expansion in output, thanks partly to the threemonth tax holiday before Sales and Services Tax (SST) takes effect in 1st September. This was the highest level since November last year (52.0) and the last time it was above 50 was in January (50.5) this year. However, new export orders broadly stagnated during the month, partially reflecting slowing global trade conditions. According to IHS Markit, the latest reading signalled an improvement in manufacturing conditions and hints 3Q18 upturn after slower in 2Q18.

● New orders rose for the first time in seven months. New orders expanded due to strong market demand and businesses and customers took the opportunity to place their orders during the tax holiday period before SST takes into effect. Additionally, backlogs of work rose for the first time in 15 months as new orders expanded.

● Weak Ringgit continues to pressure input prices. The ringgit was traded lower in August against the USD between RM4.07 to RM4.11, compared to RM4.02 to RM4.08 in July. According to the report, the rate of inflation was marginal and consequently manufacturers raised their output charges for the second consecutive month. Once SST takes into effect, input cost would further increase, compelling manufacturers to pass higher output cost down the value chain to end users. We expect the inflationary impact of a rising cost push inflation would partly be mitigated by the relatively low and stable fuel prices courtesy of the return of subsidy. This would provide enough room for Bank Negara Malaysia (BNM) to leave the overnight policy rate at 3.25% this year to support economic growth.

● According to IHS Markit, firms hiring rose for the third consecutive month in response to expansion in new orders but the rate of job creation eased to a fractional pace. Meanwhile, level of positive sentiment in August was the strongest in four months due to expected improvements in future sales and demand conditions.

● Regional manufacturing conditions improved in August despite escalating trade friction between the US and China. Manufacturing PMI in Indonesia, Japan and South Korea increased to 51.9, 52.5 and 49.9 respectively in August from 50.5, 52.3 and 48.3 respectively in July. Meanwhile, China’s PMI slowed to 50.6 in August from July’s 50.8, a record 14-months low as the worsening trade dispute weighed on manufacturing activity. China’s new export orders, an indicator of future activity of exports have contracted for the past three consecutive months.

● Since the US-China trade war erupted in July, the US has so far imposed tariffs on USD50.0b worth of imports from China. Another round of tariffs on additional USD200.0b products is in the pipeline. Although the impact on Malaysia remains uncertain, the latest PMI survey hints an inevitable slowdown in exports as global trade slows. The new government’s measures to reintroduce fuel subsidy and a tax holiday came at the right time to bolster domestic demand. However, the reintroduction of SST, with a tax rate of 10% on manufacturing goods could diminish exports’ competitive edge. Hence, despite a likely growth upturn in 3Q18, we expect GDP growth to moderate in the 2H18 to 4.7% from 4.9% in the 1H18, resulting our whole year 2018 growth forecast to slow to 4.8% from 5.9% in 2017.

Source: Kenanga Research - 4 Sept 2018