Overview

• The manufacturing sector in Malaysia appears to be approaching stabilisation, with February 2024 data showing a momentum towards the PMI threshold of 50. According to a survey by S&P Global, both new orders and production levels experienced a modest moderation, indicating the presence of some demand pockets.

• The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) recorded 49.5 during the month, a slight improvement from January's 49.0. This suggests a subtle deterioration in business conditions, marking the softest decline since the current sequence began in September 2022.

Details

• Throughout the surveyed period, the data indicated a continual reduction in manufacturing output for the nineteenth consecutive month. However, the pace of this reduction was mild, marking the slowest decline since August 2022. Respondents primarily attributed this moderation in production to weak demand conditions, although some companies observed signs of recovery in certain areas of demand.

• This trend aligns with the gentler declines observed in both total new orders and new export business. In February, both experienced a slight reduction, representing the softest declines in their respective 18- and ten-month sequences. The subdued demand has led to a degree of hesitancy among clients to commit to new projects, although some panel members noted a slight improvement in customer confidence.

• Manufacturers also saw steady workloads, but some faced a drop in business due to not having enough staff. This led to a small cut in jobs as companies tried to save costs. Despite these challenges, it's important to highlight that a few manufacturers decided to hire more full-time workers, especially in response to growing demand.

• In addition, some respondents linked a dip in outstanding business to a shortage of staffing capacity, contributing to a slight reduction in employment levels as companies aimed to cut operating costs. Notably, amidst these challenges, certain manufacturers opted to bolster their workforce by hiring additional full-time staff, responding strategically to emerging pockets of demand.

• Inflation wise, the rate of input cost picked up for the first time in three months. While the increase was milder than the usual trend and significantly weaker than the past three years, it still resulted from higher operating expenses, driven by increased raw material costs and currency weakness. Surprisingly, despite these rising costs, companies only marginally increased output charges during February. This slow increase represents the gentlest pace in the last seven months, with anecdotal evidence suggesting that some firms opted to cut prices to boost sales.

Outlook

• Malaysia's manufacturing PMI has consistently remained below the 50-point threshold since September 2022, indicating a lack of growth. However, it has demonstrated a more favourable performance in the first two months of 2024 as compared to the fourth quarter of 2023. The average PMI for 2M24 was 49.3, contrasting with the 47.5 recorded in 4Q23.

• Traditionally, we draw correlations between PMI figures and official statistics such as real manufacturing sector data, real GDP, and real exports. Notably, there exists a significant correlation of 62.2%, 60.4%, and 44.2%, respectively. Upon a more detailed analysis of the ongoing trend, there is a sense of optimism for a potential improvement in the first quarter, even if it remains below the growth threshold. This aligns with our maintained perspective, anticipating a positive momentum in the manufacturing segment's contribution to real GDP, in contrast to the 0.3% contraction observed in the final quarter of 2023 (1Q24 Real manufacturing forecast: 2.0% YoY).

• Moreover, as per insights from S&P Global, the historical relationship between PMI and official data indicates an upward trend in both GDP and manufacturing production, pointing towards improvement in the first quarter of 2024. Looking ahead, optimism for the year-ahead outlook in terms of output slightly decreased to a six-month low in February but confidence remains buoyed by the expectation of an improved demand environment and stabilised price conditions.

Source: TA Research - 4 Mar 2024