● Manufacturing PMI rose for the first time in six months (49.1; Nov: 48.4), reaching a four-month high

- This signals a possible return to recovery for the manufacturing sector, as operating conditions appear to stabilise following softer decline in external demand and steadying employment levels.

● Output index decline continued at a similar pace in December

- Attributable to a persistent moderation in new orders and production as market demand remained weighed by the pandemic and lockdown measures.

- New export orders fell for the twelfth straight month, albeit at a softer pace as orders from non-Asian countries began to return.

● Malaysian manufacturers remained optimistic, but to a lesser degree

- Positive sentiment continued for the ninth straight month, however the level of optimism eased to its softest since August. Nevertheless, manufacturers expect domestic and external demand to recover over the next 12 months, supporting a rise in production levels.

- Employment levels stabilised, with the employment index rising to a nine-month high, as additional staff were required for the preparation of future orders and to manage rising pressure on operating capacity.

● Cost pressure persisted due to raw material shortages and shipment delays

- Firms reported a seventh consecutive month of rising input costs, driven by higher prices for raw materials and shipping. The higher costs were passed onto customers, resulting in the sharpest rise in output prices in 32 months.

● Broadly positive manufacturing conditions among major and regional economies

- China (53.0; Nov: 54.9): expanded at the softest pace in three months due to a moderated rise in output and new orders, whilst hiring stagnated.

- Euro Area (55.5; Nov: 53.8): jumped to a 31-month high as both output and new orders accelerated, with exports increasing at its fastest rate in almost three years.

● Manufacturing sector to recover but in a gradual manner as COVID-19 restrictions continue

- The extension of the Conditional Movement Control Order in many states in Malaysia and the persistent surge in COVID-19 cases globally will continue to stifle demand conditions in the near term. However, we pencil in a modestly faster pace of recovery, particularly in the 2H21, given expectation of a wider rollout of COVID-19 vaccine and the gradual restoration of supply chains.

- Accordingly, we maintain the value-added manufacturing growth forecast at 5.6% in 2021 (2020F: -3.1%) in line with the projected rebound in 2021 GDP growth (6.1%; 2020F: -5.1%).

Source: Kenanga Research - 5 Jan 2021