OVERVIEW

● Manufacturing condition improved to a 7-month high, albeit remaining below the expansion threshold of 50, supported mainly by a turnaround in external demand. April PMI stood at 49.4, above March’s 47.2.

● New orders registered its largest rise in 10 months, edging up by 3.6 points to its highest level since last September, underpinned by higher export sales. In contrast to its performance in the prior five months, new export orders rose as demand from the Europe, US and regional peers (e.g. Singapore, Japan), picked up.

● Improved demand conditions prompted the acceleration in production activities, with the index increasing by 1.9 points, marking its largest rise in nearly one and a half years, coming in at the highest level since last October. Consequently, manufacturers became more optimistic with regards to their domestic and external sales prospects in the next several months, with the confidence index spiking to its strongest level since October 2013. Coupled with larger investment in new machineries and ongoing capacity expansions, manufacturers continued to hire more workers, raising the employment index to its highest in seven months.

● Operating expenses increased in April, associated with higher input cost amid rising global oil prices. As such, selling prices edged up, though it remained relatively subdued, as inflationary pressures were partly constrained by sluggish demand for other commodities as well as food and services. This was in line with our projection of a modest inflation growth in 2019, within a range of 1.0-1.5% in 2019 (2018: 1.0%), against the backdrop 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.

● Relatively weak manufacturing conditions were observed across regions, in spite of marginal monthly improvement. In the advanced economies, manufacturing sector retained its contractionary mode in the Eurozone, marking the second-steepest decline in six years on the back of continued drop in new orders. Similarly in the US, the sector grew at the second-slowest pace in the last two years, with below average growth in new business. Meanwhile, in the ASEAN region, manufacturers mostly sounded more optimistic, citing faster output and new orders growth, though the rise was largely weaker compared to those observed at the end of last year. Myanmar led the expansion, with Vietnam following closely behind, reporting increased staffing levels. Whereas in China and Taiwan, the manufacturing sector experienced a steeper deterioration, owing to bleak demand conditions.

● Though the soft patch in the first quarter may have started to recede in line with signs of upturn in foreign demand and spike in the Baltic Dry Index (1,011; Mar: 689), we retain our cautiously optimistic stance with regards to trade performance, hinging upon the yet uncertain outcome to the extended US-China trade negotiations as well as the pace of economic moderation in key export markets. Overall for the year, along with an expectation of slower domestic demand, GDP growth is projected to moderate to 4.5% in 2019 from 4.7% in 2018.

Source: Kenanga Research - 3 May 2019