Kenanga Research & Investment

Malaysia Manufacturing - Manufacturing Activity Falls to a 12-month Low in September

Publish date: Tue, 04 Oct 2022, 09:08 AM

● Manufacturing PMI fell to 49.1 in September (Aug: 50.3), its first contraction (below neutral level: 50.0) since March 2022 and a 12-month low

- The manufacturing sector lost its momentum at the end of 3Q22 amid subdued demand, as firms scaled back their production and purchasing activity. On a positive note, firms reported increasing hiring, the highest in almost three-anda-half years. Nevertheless, the slowdown is expected to be short-lived.

● Weak production in September was mainly due to subdued demand conditions

- New orders moderated in September, ending a five-month sequence of expansion amid subdued demand.

- Similarly, new export orders slowed due to weak external demand, in line with the expectation of a global economic slowdown.

● Cost pressure rise amid higher raw materials and freight costs

- Input costs continued to increase due to higher raw material and logistic costs as well as exacerbated by currency weakness. Concurrently, output costs increased at a solid pace, with firms continuing to pass higher costs onto clients.

● Firms remained optimistic, but the degree of optimism dipped to a three-month low

- Sentiment is broadly at an average level amid hopes that weakness in demand conditions in September to be shortlived and will continue to recover in the year ahead.

- Meanwhile, firms reported success in hiring additional staff, resulting in the first expansion of the workforce in ten months and the sharpest increase in job creation since April 2019.

● Slower manufacturing expansion among major economies amid subdued demand

- US (51.8; Aug: 51.5): flash manufacturing PMI expanded slightly in September versus a consensus of 51.1 due to an increase in new orders, which expanded for the first time in four months.

- Japan (50.8; Aug: 51.5): manufacturing activity slowed further in September, reaching its lowest level since January 2021 due to a slowdown in output and new orders amid subdued demand.

● Recovery in the manufacturing sector to remain intact amid heightened external risk

- Manufacturing activity is expected to remain supported by domestic demand as Malaysia shifts to endemicity with the removal of almost entire pandemic restrictions and the improvement in household income backed by robust labour market conditions and ongoing policy support. Nevertheless, we do not discount the adverse effect of the global economic slowdown brought by the energy crisis in Europe, acceleration in global monetary policy tightening led by the US Fed, and uncertainty over China's zero-COVID policy.

- Against this backdrop, we have revised our 2022 GDP growth projection earlier to 6.5% - 7.0% (2021: 3.1%) from 5.5% - 6.0%, as growth would likely be supported by strong private consumption. Going forward, we expect GDP growth to moderate to 4.0% - 4.5% in 2023, considering the imminent prospect of a global economic slowdown.

Source: Kenanga Research - 4 Oct 2022

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