OVERVIEW

● Manufacturing condition measured by Markit’s Purchasing Manager’s Index (PMI) data continue to deteriorate in March. It fell to 47.2 from 47.6 in February, remaining in contraction mode or below 50 for the sixth consecutive months. The fall was attributable to continued declines in production backed by anecdotal evidence from the survey as plateauing overseas demand hit Malaysia’s exports. However, the survey reported a bright outlook for the local manufacturers backed by forecasts of improved sales, new projects and products as well as new contract tenders.

● New orders falling on lacklustre external demand led to production decline. Demand particularly from overseas market continue to soften especially from Asian markets which cause the fall in exports, but some firms reported an improved demand from Germany and Japan. Consequently, production activities fall, pushing producers to focus on clearing outstanding business in March with higher efficiency gains, while cutting purchasing activity. Meanwhile, the employment situation was reported to be stable though some firms are cutting staff blaming on softer demand. As trade truce between the US and China remains uncertain along with expectation of a global growth slowdown, we maintain our less sanguine outlook on exports.

● Firms reported a broadly stable price levels in both input prices and output charges. This is in line with our projection of a modest headline inflation growth in 2019, with a projected range of 1.0-1.5% (2018: 1.0%), against the backdrop of global growth slowdown particularly from China and advanced economies while the on-going trade dispute remains uncertain. However, we foresee an uptick in inflationary pressure in the 2H19 driven by the new mechanism of floating domestic fuel prices and low base effect arising from the tax holiday period in June to August last year.

● Mixed manufacturing conditions were observed across the regions. Manufacturing downturn deepens in the Eurozone as manufacturers reported steepest contraction in six years in output and new orders, dragging the manufacturing PMI down to 47.6 from 49.3 in the preceding month. Meanwhile, China's manufacturing conditions registered an expansion in March (50.8) ending the 1Q19 on a positive note with rises in output and overall new work, while employment jumped for the first time in five years. In ASEAN, Myanmar lead the expansion as business conditions registered the sharpest improvement due to resilient demand from key clients, while Vietnam took the second place as output growth accelerated to the strongest rate since November 2018. Thailand also recorded a marginal expansion in the manufacturing sector while Indonesia recorded the first rise in production this year. Overall, manufacturing activity in ASEAN rebounded to 50.3 in March (Feb: 49.6) as firms in the region reported an increase in new orders and output.

● Outlook remains less sanguine as evidenced by uncertainty in global trade and growth slowdown in key export market. We are cautiously optimistic in the near-term as new exports orders are weakening citing latest manufacturing PMI reports despite some improvement in the Baltic Dry Index which grew to 689 (Feb: 658), and expansion in the region’s manufacturing activity. As expectation of slower domestic demand and manufacturing output growth, GDP growth is projected to moderate to 4.5% in 2019 from 4.7% in 2018.

Source: Kenanga Research - 2 Apr 2019