Overview

• The S&P Global Malaysia Manufacturing Purchasing Managers' Index (PMI) has continued to experience a prolonged period of contraction, marking its 15th consecutive month of decline. The index stood at 46.8 in October 2023, unchanged from previous reading in August 2023, which indicated further challenges for firms in the manufacturing sector, as demand conditions continued to wane.

Details

• Throughout the survey period, most respondents attributed the recent decline in production to subdued demand, both domestically and internationally. This qualitative observation aligns with the quantitative data, as total new orders and new export business both experienced a sustained deceleration in October.

• As new orders weakened, manufacturers redirected available resources to address existing business commitments. Consequently, backlogs of work saw a significant decline during the month, marking the most substantial reduction in the survey's history. This record-breaking backlog reduction occurred despite continued workforce downsizing, with employment shrinking for the sixth consecutive month due to reported permanent staff losses.

• In October, the rate of input cost inflation saw a gradual increase, reaching its highest level since last November. However, this recent rise was still milder than the series average and considerably less robust than what has been observed over the past three years. Respondents indicated that this inflation was a result of both currency depreciation and increased costs for raw materials in international markets. Output charges increased for the third consecutive month as companies passed on higher input costs to their customers, though the rate of inflation remained relatively modest.

Outlook

• The manufacturing sector in Malaysia continues to languish below the critical 50-point threshold, indicating a lack of growth. Over the initial ten months of 2023, the average PMI stood at a modest 47.7 (9M23: 47.8).

• The persistent downward trend in PMI during the beginning of final quarter raises significant concerns, as it likely mirrors the performance of crucial 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.

• According to S&P, the historical relationship between the PMI and official GDP data suggests that GDP is still set to improve modestly as we move into the final quarter of the year. Looking at official data on manufacturing production, however, the PMI readings are indicative of a stagnation on an annual basis. Based on our calculations, leveraging this correlation as the foundation for PMIimplied GDP growth rate, we estimate that with an average PMI of 47.7, the GDP could potentially increase by 3.5% YoY. However, this estimation relies on a simple regression analysis using one variable.

• Despite the ongoing challenges, there is optimism that the demand environment will improve over the next 12 months, boosting confidence in production outlook. Optimism has reached a six-month high, although it remains slightly below the series average. Approximately 19% of respondents anticipate output growth, while 8% hold a pessimistic outlook.

Source: TA Research - 2 Nov 2023