Overview

• The S&P Global Malaysia Manufacturing Purchasing Managers' Index (PMI) has continued to experience a prolonged period of contraction, marking its 14th consecutive month of decline. 

• The index dropped to 46.8 in September 2023, compared with 47.8 in August 2023, which indicated further challenges for firms in the manufacturing sector, with business conditions moderating to the greatest extent since January.

Details

• During the surveyed period, manufacturing new orders moderated amid widespread reports of demand weakness. The subdued demand environment was not limited to the domestic market, as new export orders also softened to the greatest extent since May 2020. 

• A lack of demand was also a key factor behind a further slowdown in production, which eased for the fourteenth month running and to the greatest extent since January. 

• Employment moderated for the fifth month in a row in September. Lower workloads and staff resignations were cited as the main reasons for reduced staffing levels. Spare capacity was also evident, with backlogs of work reducing for the sixteenth consecutive month, and at the steepest rate since July 2017. 

• Subdued demand conditions also fed through to weaker demand for inputs. Both input purchases and pre-production inventories were scaled back to the greatest extent for two years, while holdings of finished items were reduced at the quickest pace since July 2021. 

• Although input costs rose, the pace of inflation was muted in the context of the past three years. Where input prices increased, this was linked to higher raw material costs. That said, output prices were raised at a sharper rate in September, with the rate of inflation the strongest seen in ten months.

Outlook

• The manufacturing sector in Malaysia continues to languish below the critical 50-point threshold, indicating a lack of growth. Over the initial nine months of 2023, the average PMI stood at a modest 47.8. 

• The persistent downward trend in PMI during the third quarter raises significant concerns (3Q23: 47.5; 2Q23: 48.1), as it likely mirrors the performance of critical economic indicators, including industrial output, exports, and, ultimately, the GDP. Notably, there exists a meaningful correlation of 44.8%, 36.6%, and 46.1% between PMI, industrial output, exports, and GDP, respectively. 

• The observed relationship between manufacturing PMI and official economic statistics underscores the subdued economic conditions prevailing in the country. This alignment suggests that the manufacturing sector, a crucial driver of economic growth, is facing challenges, and these issues are extending to other facets of the economy. 

• Furthermore, the presence of a high base factor in the third quarter is expected to exert additional downward pressure on growth figures. This phenomenon compounds the challenges faced by policymakers and businesses alike, highlighting the need for proactive measures to stimulate economic recovery in the current environment. 

• Based on our calculations, the YTD figure still indicates growth in official GDP numbers. Leveraging this correlation as the foundation for PMI-implied GDP growth rate, we estimate that with an average PMI of 47.5, the GDP in 3Q23 could potentially increase by 3.4% YoY (TA official forecast: 3.5% YoY). However, this estimation relies on a simple regression analysis using one variable. 

• Despite the persistent challenges, Malaysian manufacturers are exhibiting growing optimism. This optimism is primarily fueled by the belief that the current weakness in demand will gradually dissipate. Consequently, the overall degree of optimism has reached its highest level since May. This positive sentiment is commonly attributed to expectations of an improved demand environment, which would facilitate new order inflows and create new business opportunities. Nevertheless, firms remain cautious due to uncertainties surrounding the timing of the recovery.

Source: TA Research - 3 Oct 2023