● Manufacturing PMI rose to 48.1 in September (Aug: 43.4) but remained at a contraction level (below 50-level)

- Subdued manufacturing conditions persisted due to the surge of COVID-19 infections, albeit relatively improving as the government eased restrictions.

● Output and orders decline at a slower pace

- Pandemic restrictions continue to impede production capacity and demand. Nonetheless, external demand moderated at a slower pace, supported by demand from the middle east and the US.

● Degree of optimism reached the highest since April

- Optimism rose, clinging to the hope that the COVID-19 pandemic would end and demand to recover on the back of new projects.

- However, the employment level fell for the second straight month mainly due to difficulties in hiring foreign workers amid strict border restrictions.

- Consequently, backlogs of work increased, and partly due to sustained raw material shortages and weak productivity.

● Cost pressure persisted due to ongoing raw materials shortages

- Input costs increased for the sixteenth month at a rate similar to the preceding month. Subsequently, firms partially passed higher costs onto clients, with output charges rose at the fastest pace since May.

● Mixed manufacturing conditions among major economies

- China (50.0; Aug: 49.2): rebounded to a neutral level as factory activity stabilised after a slump in August due to COVID-19 resurgence and power supply crunch.

- US (60.5; Aug: 61.1): flash manufacturing PMI reading down to a five-month low as manufacturers reported longer lead times on trucking issues and capacity shortages.

● Gradual recovery expected in manufacturing conditions

- The resurgence of COVID-19 cases brought by the Delta variant indeed has undermined growth recovery in the 3Q21 with imminent supply chain disruptions and subdued demand as many countries reimposed movement restrictions to combat the virus. Nonetheless, we expect the domestic manufacturing sector to gradually recover in the final quarter of this year and remain supported by the export-oriented industry on the back of the progress of the vaccination program.

- Against this backdrop, we maintain the value-added manufacturing growth forecast at 2.1% in 3Q21 and is expected to expand to 4.5% in the final quarter as Malaysia transitions towards an endemic phase as restrictions are relaxed and most economic sectors reopens. Overall, manufacturing sector is expected to rebound by 9.1% (2020: -2.6%), with GDP growth projected to settle at 3.5% - 4.0% (point forecast: 3.7%) in 2021.

Source: Kenanga Research - 4 Oct 2021