● Manufacturing PMI fell sharply to 39.9 in June (May: 51.3), the lowest since April 2020

• The poor index reading was primarily due to the reinstatement of nationwide Movement Control Order (MCO 3.0) amid a surge in COVID-19 infections, which significantly disrupted demand.

● Output and orders moderated sharply since April 2020 due to MCO 3.0

• Weak domestic and external demand as a result of the containment measures. Nonetheless, the pace of decline in export sales was softer than a drop in total new orders.

● Extended lockdown amid uncertainty on economic recovery weighed on sentiment

• The degree of optimism fell to the lowest in a record weighed by concerns about the duration of the pandemic and fears of a new wave of infections that could disrupt demand and supply.
• Employment level fell slightly in June as firms reduced outstanding business using available capacity. Consequently, the rate of backlog depleted at a faster pace.

● Cost pressure persisted due to ongoing raw materials shortages despite subdued demand

• Input costs rose for the 13 straight month and led to higher output prices as manufacturers partially passed higher costs onto clients.

● Mixed manufacturing conditions among major and regional economies

• China (50.9; May: 51.0): eased slightly to a four-month low on higher raw material costs, a shortage of semiconductors, an outbreak in the major export province, and broader supply chain disruptions in Asia.
• US (62.6; May: 62.1): flash manufacturing PMI rose to a record high thanks to solid domestic demand. However, manufacturers are still struggling to secure raw materials and labour.

● Less sanguine over the manufacturing outlook in the near term, weighed mainly by the prolonged movement restrictions

• The resurgence of COVID-19 cases and fears over the Delta variant would likely impede the demand and supply chain due to the strict containment measures to curb the spread of the virus.
• Nonetheless, we still expect a recovery in the manufacturing sectortowards the 4Q21 as the economy gradually reopens in line with the National Recovery Plan. Meanwhile, key sub-sectors such as E&E and rubber gloves will continue to support the manufacturing growth due to strong external demand while they are allowed to resume operation, albeit at a reduced capacity. This will be supported by the technology upcycle, aggressive 5G adoption, the progress of the COVID-19 vaccination program, elevated commodity prices, and pent-up demand amid ongoing various stimulus measures.
• Against this backdrop, we retain the value-added manufacturing growth forecast at 8.6% (2020: -2.6%). Likewise, we maintain the 2021 GDP growth forecast at 5.0-6.0% (point forecast: 5.5%; 2020: -5.6%) as the PEMULIH economic stimulus package announced by the government may likely provide temporary relief and partially support the economy from further downside.

Source: Kenanga Research - 2 Jul 2021