● Manufacturing PMI moderated to 51.3 in May (Apr: 53.9) but remained in expansion for the second straight month

- The index reading signalled a sustained recovery in the manufacturing sector despite the surge in COVID-19 infections and the nationwide Movement Control Order (MCO 3.0).

● Output moderated weighed mainly by the global supply chain disruption

- Attributable to lower new export orders due to supply disruptions resulting from surging COVID-19 infections in the regional market.

- Nonetheless, growth was supported by sustained expansion in new orders thanks to strong local demand for goods.

● Uncertainty on economic recovery weighed on sentiment

- The degree of optimism down to the lowest in four months dragged by renewed restrictions and ongoing supply disruptions. Nonetheless, manufacturers remained optimistic that output would increase in the next 12 months.

- Employment fell marginally in May due to lower production requirements in line with lower output amid supply disruptions and restriction measures.

● Cost pressure persisted due to ongoing raw materials shortages

- Input costs rose for the 12 straight months and led to higher output prices as manufacturers partially passed higher costs onto clients.

● Broadly positive and sustain manufacturing expansion among major and regional economies

- China (52.0; Apr: 51.9): strongest expansion recorded in 2021 driven by solid demand from domestic and overseas.

- US (61.5; Apr: 60.5): flash manufacturing PMI rose to a record high amid strong domestic demand. However, manufacturers struggle in sourcing raw materials and labour.

● Sanguine manufacturing sector outlook retained on the back of sustainable recovery in major export destinations

- Manufacturing activity is projected to remain on a recovery path on the back of the technology upcycle, aggressive 5G adoption, the progress of COVID-19 vaccination and pent-up demand amid various stimulus measures. Nonetheless, downside risks remain primarily associated with COVID-19 resurgence and movement restriction as well as the shortage of raw materials that would likely disrupt the supply chain.

- Against this backdrop, we upgrade the value-added manufacturing growth forecast to 8.6% (2020: -2.6%) from the previous projection of 7.5%. However, we revised down 2021 GDP growth forecast to 5.0-6.0% (point forecast: 5.5%; 2020: -5.6%), reflecting the impact of strict nationwide MCO 3.0 on domestic demand.

Source: Kenanga Research - 2 Jun 2021