● Manufacturing PMI slowed to 50.3 in August (Jul: 50.6) but remained on the expansion path (above neutral level: 50.0) for the fifth straight month

- Softer improvement was recorded in the manufacturing sector in August amid moderation in output volumes weighed persistently by difficulty in sourcing input and delivery delays. The moderation in manufacturing growth is in line with our cautious outlook amid ongoing downside risks which impede its growth potential.

● Muted production in August was caused by sustained shortages delivery delays and raw material 

- Nevertheless, new orders rose for the fifth straight month with the strongest pace since April, driven by improved client confidence, particularly in domestic markets, reflecting resilient domestic demand.

- However, new export orders fell for the second straight month and at the sharpest pace in 12 months due to subdued external demand, in line with the expectation of weak global economic conditions.

● Cost pressure remained elevated amid higher raw materials and freight costs

- Input cost increased for the 27th month but at a slower pace due to higher raw material and logistic costs. Concurrently, output costs increased at the softest rate in 12 months, with firms continuing to pass higher costs onto clients.

● Firms remained optimistic, with the degree of optimism rising to a seven-month high

- Sentiment continues to improve amid hopes that demand conditions will continue to recover as the pandemic is brought under control.

- Meanwhile, firms reported ongoing labour shortages, with employment levels falling for the seventh month.

● Slower manufacturing expansion among major economies amid subdued demand

- US (51.3; Jul: 52.2): flash manufacturing PMI showed a slower expansion in August. It fell to a 25-month low due to the muted demand conditions and production cutbacks.

- Japan (51.5; Jul: 52.1): manufacturing activity slowed further in August due to a sharp decrease in new orders amid rising COVID-19 cases as well as weaker domestic and global economic conditions.

● Manufacturing activity to remain on positive expansion despite heightened downside risks

- We expect manufacturing activity to expand at a moderate pace in 2H22, weighed by the global economic slowdown. However, the manufacturing sector is likely to remain supported by strong domestic demand amid improvement in household income, as reflected in the sustained improvement in labour market conditions.

- Nevertheless, the manufacturing conditions remain susceptible to downside risks, particularly the ongoing labour shortages, rising inflation threat, the prolonged impact of China's zero-COVID policy, the Russia-Ukraine conflict, and the energy crisis in Europe. Against this backdrop, we maintain our 2022 GDP growth forecast at 5.5% - 6.0% (2021: 3.1%).

Source: Kenanga Research - 2 Sept 2022