● Manufacturing PMI dipped to a 3-month low at 49.3 in August after reaching its neutral mark at 50 in July

- Manufacturing production was relatively stable in August albeit losing some momentum gained during the initial rebound in June after the implementation of Recovery Movement Control Order (RMCO) due to a moderation in business conditions and deterioration in export orders.

● Further reduction in output index as new export orders continued to fall

- Demand for goods and services continued to recover from record fall in April following the loosening of government stay-at-home order.

- However, new export orders continued to collapse on the back of weak consumer demand in the foreign markets.

● Firms are, on balance, expecting to grow in the coming year. However, confidence remaineddented due to thelingering threat of COVID-19 pandemic

- A weakening of business sentiment and confidence due to the pandemic has forced firms to operate with spare capacity as backlogs of work were reduced thoroughly.

- Due to the lack of capacity pressure and efforts to reduce production costs, many firms were forced to scale back employment, resulting in the sharpest staffing reduction level since the survey began in July 2012.

● Cost pressure intensified due to raw material shortages

- Input prices rose for the third straight month as material shortages and issues receiving imported goods has led to a ninth successive monthly lengthening of suppliers’ delivery times.

- Nevertheless, feeble demand and rising competition had led firms to offer some discounts, resulting in a slower rise in output prices.

● Improved manufacturing performance across the region

- China (53.1; Jul: 52.8): stayed in expansionary territory for the fourth straight month, reaching a high last seen in 2011 as the economy recovered further from the COVID-19 downturn.

- US (53.6; Jul: 50.9): fastest improvement rate since January 2019, driven by quicker expansions in output and new orders.

● Softening external demand due to the COVID-19 resurgence could stymie manufacturing sector recovery

- The recovery in the manufacturing activity is continuing and is expected to improve further despite the extension of RMCO to Dec 31st. However, we remain cautious amid increasing uncertainty about future overseas demand and business conditions due to the recent resurgence in global COVID-19 infections.

- As such, value-added manufacturing growth is projected to contract by 6.3% in 2020 (2019: 3.8%) in line with the projected decline in 2020 GDP growth (-5.9%; 2019: 4.3%).

Source: Kenanga Research - 2 Sept 2020