● Manufacturing Purchasing Managers’ Index (PMI) remained unchanged in August (47.8; Jul: 47.8), reflecting a subdued demand in 3Q23

- The index remained in contraction level (below the neutral level: 50.0) for the twelfth consecutive month or since September 2022. The continued slowdown in the manufacturing industry was largely attributed to the overall decrease in businesses’ demand.

● Output production was scaled down due to subdued demand conditions amid weak customer confidence

- New orders eased slightly from July, but there was a modest improvement on a YoY basis.

- Demand for exports fell for a fourth consecutive month, indicating a sustained weakness.

- Consequently, output levels fell for the thirteenth straight month as production volumes were scaled back. Nonetheless, the pace was similar to the previous month.

● Cost pressures continue due to a weak exchange rate

- Input costs accelerated for the fifth month in August, with a solid increase and the strongest reported since November 2022. This was mainly attributed to high prices of mainly imported raw materials amid weak exchange rates. In response, output charges were raised for the first time in three months at the highest rate since February.

● Optimism remained modest among manufacturers

- Mainly backed by expectations of renewed growth in new orders production in the next 12 months. Nevertheless, the degree of optimism is modest and below the long-run series average as the subdued demand continues.

- Employment continued to fall as firms scaled back hiring due to the non-replacement of voluntary leavers.

● Manufacturing conditions among major economies in August

- South Korea (48.9; July: 49.4): S&P global manufacturing PMI edged lower due to sustained deterioration in operating conditions as reflected by lower factory output, which dropped at a faster rate than the previous month.

- China (51.0; July: 49.2): Caixin Manufacturing PMI surprisingly rebounded above the neutral level, marking the highest reading since February, indicating improving domestic demand and expansion on factory production.

● Weak external demand outlook is expected to weigh on manufacturing activity in the near term

- The lower Manufacturing PMI reading in August reflects a persistent weakness in the manufacturing conditions largely due to subdued demand from the external sector. This is also partly due to the higher base effect recorded last year and as the economy return to normalcy with the absence of stimulus measures.

- Likewise, we have revised the 2023 GDP growth forecast to 3.5% - 4.0% from 4.7% (2022: 8.7%), following a slower-than-expected GDP growth performance in 2Q23 (2.9%; 1Q23: 5.6%). This is mainly due to the expectation of a continued slowdown in the global growth outlook brought by the slower-than-expected recovery in China’s economy and the lag effect of the higher interest rate environment led by the advanced economies. Nonetheless, we believe domestic growth will continue to be supported by resilient domestic demand amid steady labour market conditions and further improvement in the services sector backed by a gradual increase in tourism activities.

Source: Kenanga Research - 4 Sept 2023