OVERVIEW

● Manufacturing condition stumbled for the second consecutive month in November as weak demand conditions continued to drag the Purchasing Managers Index further below the 50.0 threshold. November PMI came in at 48.2 (Oct: 49.2), the lowest in six months.

● New orders marked a significant drop, declining at the fastest pace in six months, while export sales increased, albeit marginally relative to the previous month. Domestically, demand was seen weaker in 4Q18 thus far, in part contributed by the implementation of the SST. On the external front, the rise in new business from overseas was reported as marginal, amid the ongoing trade tension. President Trump’s agreement to refrain from raising tariffs on USD200b in Chinese goods from 10.0% to 25.0% as initially planned for January 2019, for as long as 90 days, is expected to provide temporary relief to export-dependent countries.

● The increase in input prices in November softened from an 11-month peak seen in October, but the figure remained relatively strong, associated with unfavourable ringgit movements and rising raw material prices. Selling prices were consequently rising at a faster rate, as firms tried to alleviate margin erosion. Nevertheless, in the remaining months of 2018, inflation is expected to remain below 1.0% as the pressure arising from cost-push inflation will be partly mitigated by fuel subsidies, particularly the continued fixation of RON95 price at RM2.20, and high base effect from the previous year. On a year-to-date basis, the CPI has moderated to 1.1% compared to 3.9% in the same period a year ago. Hence, the 2018 CPI growth is expected to hit the lower end of our forecast range of 1.0- 1.5% (2017: 3.7%).

● Mixed manufacturing conditions were observed across regions. In the advanced economies, manufacturing activity retained its expansion, albeit at a slower pace. Manufacturing PMI eased to a 3-month low in the US, amid limited production growth and slower rate of inventory accumulation. Similarly, in the euro area and Japan, manufacturing activity weakened due to weaker exports and new orders. Within Asia, pronounced slowdown was seen in Taiwan, as it contracted at the fastest pace in 37 months, and Korea, as its PMI fell due to declines in new orders and export sales. Meanwhile, manufacturing activity showed sustained expansion in China, Philippines and Indonesia, supported by new orders mainly from the domestic front amid further declines in export orders.

● Global manufacturing activity is expected to remain subdued going forward. We expect to observe weaker trade figures in the coming months as new exports orders were weak across regions and as Baltic Dry Index inched lower, pointing towards softer demand for raw materials. Hence, we maintain our view that GDP growth will 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 Dec 2018