● Manufacturing PMI expanded slightly to 50.4 in June (May: 50.1)

− Manufacturing activity in June improved slightly, underpinned by an improvement in production level amid ongoing price pressures as well as labour and supply shortages. This suggests that the manufacturing sector is still grappling with downside risks that could hinder its potential growth despite the reopening of economic and social activities from April 1 as the country transitions to the endemic phase.

● Production levels relatively improved despite ongoing labour and supply shortages as well as rising prices

− New orders increased for the third month in June, driven by improved client confidence, but partially capped by ongoing labour and supply shortages.

− Meanwhile, external demand was broadly stagnant in June, weighed by COVID-19 restrictions in China but was supported by other trading partners.

● Cost pressure intensified amid supply shortages

− Raw material shortages amid higher prices and logistic costs contributed to higher input prices. Concurrently, it led to rising output costs with firms continuing to partially pass higher costs onto clients.

● Manufacturers remained optimistic about future output, but the degree of sentiment eased to a 10-month low

− Sentiment was dragged due to concerns about global economic recovery and the impact of higher prices.

− Meanwhile, the employment level fell in June, primarily attributable to the non-replacement of voluntary leavers and a lack of available foreign workers.

− Nevertheless, outstanding business was reduced slightly amid subdued demand.

● Manufacturing activity moderated sharply among major economies

− US (52.7; May: 57.0): manufacturing PMI slowed sharply to a two-year low in June as output stalled and new orders contracted amid weak demand.

− Japan (52.7; May: 53.3): manufacturing activity slowed in June due to rising prices and supply pressures, which led to slower production levels.

● Manufacturing expansion to continue amid heightened downside risks

− We retained our outlook that manufacturing activity would remain on a recovery path as the country transitioned to the endemic phase from April 1. However, growth is expected to be moderate given the elevated external pressures associated with China’s zero-Covid policy and the Russia-Ukraine crisis, which have led to global supply disruptions and fuelled global inflation.

− However, we believe the adverse effect is expected to be minimal due to Malaysia’s export diversification back by a solid E&E sector, elevated commodity prices, and robust external demand from key trading partners. Against this backdrop, we maintain our 2022 GDP growth forecast at 5.0% - 5.5% (2021: 3.1%).

Source: Kenanga Research - 4 Jul 2022