● Manufacturing PMI fell to a 5-month low at 48.5 in February from 48.9 in January

- Attributable to slower production volume which was unfavourably affected by delayed deliveries of key raw materials and supplies from China and reduced overseas demand.

● Output index dipped to an 8-month low indicating softer production growth

- Export orders were hit by both demand and supply side headwinds causing it to decline at its fastest rate since November 2012.

- The impact of COVID-19 was apparent in total new order intakes, which fell to its lowest since September 2019.

● Degree of optimism plunged to a 20-month low

- Uncertainty towards raw material supplies and demand weighed heavily on confidence but manufacturing output outlook remained relatively strong as some companies foresee a pickup in economic growth 12 months ahead.

- In addition, employment fell as some firms chose not to renew contracts for some employees on expectation of production slowdown due to supply chain disruption caused by the coronavirus outbreak.

● Input cost slightly accelerated on supply shortages

- To cope with the rising input cost, manufacturers opted to absorb the rise in costs.

- They also reduced their output price marginally compared to January and gave discount on their charges in effort to boost demand and increase competitiveness.

● Mixed manufacturing performance across regions

- Eurozone (flash: 49.1; Jan: 47.9): rose to one-year high but supply-side constraints emerge as average lead times for the delivery inputs lengthened.

- China (40.3; Jan: 51.1): fell at record pace due to coronavirus-related factory shutdowns. Consequently, production and new employment level fell at the quickest pace since the survey began in April 2004. Meanwhile, firms struggled to get hold of inputs due to travel restrictions and companies operating below their capacity due to restrictions.

● Manufacturing sector may see a gradual recovery in the 2H20

- Following an expected slowdown in the 1H20, we project the manufacturing sector to gradually recover in the 2H20 on a delayed upturn in the tech cycle, the impact of the RM20.0b fiscal stimulus as well as further monetary easing.

- The continued rise of COVID-19 cases outside China coupled with US-China trade uncertainty and geopolitical tensions will continue to exert pressure on the manufacturing sector.

- Overall, value-added manufacturing growth is projected to slow to 3.5% in 2020 (2019: 3.8%; 2018: 5.0%) in line with the slower GDP growth forecast of 4.0% for 2020 (2019: 4.3%).

Source: Kenanga Research - 3 Mar 2020