• The Manufacturing Purchasing Managers’ Index (PMI) fell to 49.7 in July (Jun: 49.9), remaining below the neutral level for the second straight month
  
  − The latest PMI reading was largely due to a slowdown in output and new orders but was partially mitigated by the increase in exports.

• Production declined slightly but was supported by improved external demand
  
  − New orders eased slightly for the first time in three months due to subdued demand, leading to a decline in overall production. However, the slowdown was mitigated by increased export orders attributable to higher demand from the Asia and Oceania regions.
  
  − Additionally, the purchasing activity, stocks of inputs and inventories of finished goods were reduced.

• Inflation edged higher in July amid persistent price pressure
  
  − Input cost increased to an eight-month high, subsequently leading to a higher output price with the pace of increase accelerated sharply, the highest since September 2022.

• Firms remained sanguine on the outlook for future output
  
  − Confidence improved, with the level of optimism increased to the highest since March, but still below the long-runaverage as firms were cautious about the timing of a domestic demand recovery.
  
  − However, employment levels were scaled back for the first time in four months, mainly due to the non-replacement of voluntary leavers.

• Mixed manufacturing conditions among regional economies
  
  − China (49.8; Jun: 51.8): The Caixin Manufacturing PMI fell below the neutral level for the first time in nine months,due to renewed reduction in new work inflows, underpinned by a marked slowdown in output growth.
  
  − Vietnam (54.7; Jun: 54.7): Manufacturing PMI remained unchanged and above the neutral level, reflecting a sustained business condition marked by a rise in new orders.

• Manufacturing sector recovery remains subject to the pace of technology upcycle and the economic conditions of major trading partners such as China and the US amid persistent downside risks
  
  − Despite poor Manufacturing PMI reading in July, we still expect the recovery in the manufacturing sector especially the export-oriented industries, to gain momentum in the second half of the year. This optimism is driven by the anticipated technology upcycle, fuelled by higher demand for artificial intelligence (AI) and various stimulus measures in China. However, downside risks persist, particularly from external factors like renewed US-China trade tensions, the escalating Middle East crisis and the prolonged Russia-Ukraine war, which continue to weigh on the global supply chains and demand.
  
  − However, given the better-than-expected 2Q24 GDP growth (DOSM advance estimate: 5.8%), we maintained our bullish outlook on 2024 GDP growth. We expect it to settle near our upper-end target range of 4.5% - 5.0% (2023: 3.6%) thanks to strong domestic demand and continued expansion in the services sector.

Source: Kenanga Research - 5 Aug 2024