OVERVIEW

● Manufacturing condition deteriorated to a record low in December, dragging the sector to a contraction in 4Q18, due mainly to lower production and plateauing demand, both domestically and externally. December PMI came in at 46.8 (Nov: 48.2), its sharpest contraction since the initiation of the survey in July 2012.

● New orders tumbled significantly, reflecting a slowdown in demand, which was also observed across several regional peers. Demand softened amid negative spillovers from China-US trade war and a moderation in activities in China. On a similar direction, new export orders fell, albeit marginally, as orders from the European and the Asiapacific regions slowed. The slowdown pointed towards a bleak outlook, particularly for export activities in the coming months.

● Operating expenses retained an uptrend in December, associated with unfavourable ringgit movements and rising raw material prices. Selling prices were consequently rising, although partially contained through stiff competition and requests for discounts. Nevertheless, for 2019 CPI is projected to only increase modestly, within a range of 1.0-1.5% in 2019, given prospects of a moderation in global growth and lower crude oil prices, which will partially offset inflationary pressure emanating from cost-push inflation, floating of domestic fuel prices in 2Q19 and low base effect arising from the tax holiday period in June to August 2018.

● Mixed manufacturing conditions were observed across regions. In the advanced economies, growth in the manufacturing activity moderated. Flash US manufacturing PMI extended lower from 55.3 to 53.9 in December, a 13- month low citing a decline from new orders and employment. According to IHS Markit, respondents reported that heightened economic uncertainty and concerns about the near-term business outlook had contributed to more cautious spending among clients in the US. Within Asia, South Korea’s manufacturing PMI remained below 50 but increased to 49.8 from 48.6 in November due to weak sales from domestic and overseas market evidenced by weak exports which fell by 0.8% YoY in December. Meanwhile, Thailand’s manufacturing sector rose slightly to 50.3 in December thanks to growth in output and export sales. Similarly, Indonesia’s manufacturing PMI improved for the first time in four months to 51.2. Overall, manufacturing activity in ASEAN remained above 50 though it edged lower to 50.3 from 50.4 in November.

● Global demand to continue its downtrend in 2019. We expect external demand to weaken in the coming months as new exports orders were weak across the region and the Baltic Dry Index continue to edge lower, reflecting softer demand for raw materials while the US-China trade war jitters continue to weigh on global trade. Despite the ongoing trade truce between the US and China now entering its second month with both parties engaging in intense talks to lessen the impact from the trade war, we remain sceptical that it could bring about any major breakthrough and concern that it may continue weigh on Malaysia’s economy. Hence, we maintain our view that GDP growth is estimated to have moderated in the 2H18 to 4.7% from 4.9% in the 1H18, bringing the 2018 growth to moderate to 4.8% from 5.9% in 2017. With global demand and commodity prices waning, a slower growth trajectory would be more realistic for 2019 which we projected to settle at 4.7%.

Source: Kenanga Research - 3 Jan 2019