OVERVIEW

● Manufacturing activity slowed further in July, remaining in a contractionary mode for the tenth consecutive month. The deterioration in the Purchasing Manager’s Index (PMI) was attributable to softer demand conditions, amid a challenging business environment. July’s PMI reading stood at 47.6, a tad lower than 47.8 recorded in the preceding month.

● Weak demand conditions weighed production activities and hiring but were offset by positive export demand. The seasonally adjusted output index edged up for the first time since April despite a lacklustre domestic demand. This is mainly due to the net inflow of new business from abroad, thanks to higher export demand from the US, Japan and Turkey, which lifted seasonally adjusted new order index above weak levels. As firms takes a more cautious approach in purchasing and hiring, employment was reduced in the period.

● Nonetheless, manufacturers remained optimistic on improved production growth over the next 12 months, and expect order book volumes to pick up amid downside risk from the external sector.

● Input cost rose in July underpinned by unfavourable exchange rate though Ringgit edged higher against USD in July at 4.12 (June: 4.16). Besides, increased charges from suppliers and higher utility costs also prop up cost. However, the rate of inflation eased to a three-month low, indicating an easing of inflationary pressure on the supply chain. According to IHS Markit survey report,manufacturers raised their output charges marginally, as most firms transfer cost burden to customers. Hence, we expect inflation to moderate in 2H19 and maintain our slower CPI growth forecast of 0.7% in 2019 (2018: 1.0%).

● Global manufacturing activity slumped. In the advanced economies, German Flash Manufacturing PMI dipped to a seven-year low weighed by a decreased in new orders, employment and inventories. Overall, Flash Manufacturing PMI in Eurozone fell to a reading of 47 in July (June: 48.5), the lowest in more than six years. This could prompt the European Central Bank (ECB) to relaunch monetary stimulus in the next policy meeting on 12th September. Meanwhile, Flash US Manufacturing PMI eased to 50.0 from 50.6 in June, a record 118-month low, signalling that the economy is to start the 3Q19 at a disappointing pace. Hence, this prompted the US Fed to cut its policy rate by 25 basis points at its recent FOMC meeting. Similarly, ASEAN manufacturing PMI fell to a two-year low of 49.5 from 49.7 in June, pointing to a further deterioration in manufacturing conditions due to a slight reduction in overall output. In China, factory activity shrank for the third month in a row due to sluggish demand at home and abroad, as a result of prolonged trade war and growth slowdown.

● Meanwhile, there is no clarity whether the trade deal between US and China would be finalised anytime soon or even a clearer path to more substantive future talks. Hence, this supports our view to remain cautiously optimistic on manufacturing activities given the rise of external risk. Overall, we expect GDP growth to moderate to 4.5% in 2019 (2018: 4.7%) on the back of slowdown in key export markets and an expectation of softer domestic demand.

Source: Kenanga Research - 2 Aug 2019