Overview

• The manufacturing sector in Malaysia experienced a contraction in March, failing to surpass the 50- threshold mark, according to a survey conducted by S&P Global. The report highlights a continued moderation within the sector, attributed to subdued demand conditions. The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) declined from 49.5 in February to 48.4 in March.

Details

• During the surveyed period, new orders in March continued to decline for the nineteenth consecutive month, reflecting persistent weak demand. The pace of reduction accelerated compared to February and marked the most significant decline observed in 2024 thus far. Additionally, subdued demand was evident in international markets, where sales moderated for the eleventh consecutive month. Correspondingly, production softened to the greatest extent in three months, with a solid overall reduction rate mirroring the trend in new orders.
   
• Furthermore, companies were once again able to diminish their backlogs of work amid the subdued demand environment, with the depletion rate reaching its highest level since last October. Towards the end of the first quarter, purchasing activity, input stocks, and finished goods inventories were all reduced, although the rate of moderation in purchasing stocks eased slightly compared to the previous month.
   
• Employment was scaled back for the third consecutive month in March. While the rate of job shedding was only marginal, it was the steepest seen in four months as firms reduced headcounts in line with capacity requirements.
   
• The rate of input cost inflation reached a three-month high due to currency depreciation and increased global raw material prices. Despite this uptick, the inflation rate remained below the series average. Conversely, prices charged for manufactured goods were unchanged from February, halting a seven-month streak of inflation.

Outlook

• Malaysia's manufacturing PMI has persistently stayed below the 50-point threshold since September 2022, signaling a lack of growth. However, it showed a more promising performance in the first quarter of 2024 compared to the fourth quarter of 2023. The average PMI for 1Q24 was 49.0, contrasting with the 47.5 recorded in 4Q23.
   
• Moreover, insights from S&P Global suggest a historical relationship between PMI and official data indicating an upward trend in both GDP and manufacturing production, pointing towards improvement in the first quarter of 2024. We establish 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 conducting 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 economy. This is in contrast to the 0.3% contraction observed in the final quarter of 2023, with a forecast of 2.0% YoY growth for 1Q24 in real manufacturing.
   
• Looking ahead, hopes of a stronger improvement in demand were key to optimism regarding the 12-month outlook for output at the end of the first quarter. The overall level of confidence eased to the softest since last August, as manufacturers highlighted concerns regarding the timing of a hoped-for recovery in demand.

Source: TA Research - 2 Apr 2024