Manufacturing PMI dipped to a 4-month low to 48.8 after it briefly reached the neutral mark 50 in December

• Attributable to weak export demand, in spite of the positive development surrounding the phase-one US-China trade deal agreement.
• This supports our view that 1Q20 GDP growth momentum is expected to be slow (3.8%).

Output index dropped in line with a moderation in annual production growth

• Export orders decline for the first time in three months on the back of a weak global trade environment.
• Consequently, total order book volumes declined sharply since September level, forcing firms to curb output.

Business optimism strengthened on the back of positive development in the trade feud

• Output expectations exceed the historical average, suggesting that firms expect the current sluggish manufacturing activity to be temporary.
• Employment, however, dropped in January mainly due to voluntary leavers due to the Lunar New Year celebration and sufficient staffing numbers, while some firms linked this as an effort to control cost.

Cost pressures intensified, signalling a potential rise in inflation going forward

• Input costs increased to a 5-month high on higher import prices, material shortages, and higher input charge by suppliers.
• Nevertheless, higher operating expenses during the month were absorbed by firms as output charges dropped fractionally in January.

Mixed manufacturing performance across regions

• Eurozone (flash: 47.8; Dec: 46.3): rose to a 5-month high but remained in the contraction territory, signalling weak growth momentum in the manufacturing activity.
• US (51.7; Dec: 52.4): fell to a 3-month low on weak domestic and foreign demand, but broadly sustained albeit at a slower expansion.
• China (51.1; Dec: 51.5): slowest expansion since August 2019 as firms took a cautious approach in terms of buying activity amid lower demand. Similarly, the official PMI manufacturing, which reflects sequential growth momentum, moderated to 50.0 in January from 50.2 in December

Outlook retains, with signs of recovery for the manufacturing sector in the 2H20

• We expect the manufacturing sector to soften in the 1H20 before gradually recover in the 2H20 on a potential upturn in the tech cycle, lagged impact from the recent OPR cut, and government steps up on fiscal spending.
• Headwinds remain in particular the developments of the US-China trade negotiation, geopolitical tension, and the impact of coronavirus outbreak, which have recorded more than 360 deaths so far.
• Overall, the manufacturing growth is projected to moderate slightly to 4.2% in 2020 (2019F: 4.5%; 2018:4.8%) in line with the slower GDP growth forecast of 4.3% for 2020 (2019F: 4.5%)

Source: Kenanga Research - 4 Feb 2020