● Manufacturing PMI rebounded sharply to 45.6 in May (Apr: 31.3) but still at record lows (Index below 50 indicates growth contraction)

- Attributable to the relaxation of the Movement Control Order (MCO) as almost all economic sectors and business activities are allowed to resume operations

● Further reduction in output index, though the rate of contraction eased from April’s record low

- The implementation of the Conditional MCO (CMCO) on May 4th had a positive impact on the economy as most manufacturers resumed operations after being closed since the MCO began on 18th March. However, those that took the full brunt of the COVID-19 impact remain shuttered, and mostly working with limited operations.

- New orders continued to fall as the global-wide lockdown measures continued to take a toll on global demand. In addition, the unfavourable economic conditions at key trade partners has led to a decline in overseas sales.

● Signs of optimism gradually emerge as survey data pointed to a rise in business confidence

- Firms hopes abound on the expectation of a recovery in demand would drive production volumes higher in the upcoming months.

- Manufacturing employment was held broadly stable, with the majority of firms signalling no change in their payrolls as more business emerges from coronavirus led shutdowns.

● Input delivery times lengthened markedly: detrimental to a sustainable growth recovery

- Manpower shortage coupled with transportation restrictions and the extension of CMCO has led to a longer supplier lead times and production delays.

- Sharp decline in purchasing activity has contributed to a further marked drawdown of pre-production inventories.

● Mixed manufacturing performance around the world

- US (39.8; Apr: 36.1): rose to a 2-month high, signalling a slower, but still sharp decline in production and new order amid challenging domestic and foreign demand conditions and historic level of unemployment.

- China (50.7; Apr: 49.4): rose to a 5-month high as the easing of China lockdown restrictions has led to a stronger rise in Chinese manufacturing output, quickest rate of expansion in over 9 years.

● Further easing in COVID-19 restrictions to partly help speed up the recovery in the manufacturing sector.

- However, the recovery momentum for manufacturing sector may hit a snagon shrinkage in global demand as well as the risk of a second-wave mass infection.

- Although Malaysia may have flattened the infection curve, it is not out of the woods yet. Its manufacturing sector is still at the mercy of global demand. Hence, value-added manufacturing growth is projected to contract by 6.3% in 2020 (2019: +3.8%) in line with the expected decline in GDP growth (-2.9%; 2019: 4.3%).

Source: Kenanga Research - 2 Jun 2020