Overview

• The manufacturing sector in Malaysia experienced a contraction in June, falling back below the 50- threshold mark as overall demand remained subdued, according to a survey conducted by S&P Global. Nonetheless, the report highlights a broadly stable performance of the sector during the month, as new orders increased for the second consecutive month, partly due to a rise in exports. The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) declined from 50.2 in May to 49.9 in June.

Details

• During the surveyed period, new orders rose for the second consecutive month in June. However, panelists indicated that demand remained subdued, resulting in a modest and slower rate of expansion compared to May. The overall increase in new business was partly driven by consistent growth in new export orders, which have now risen for three consecutive months. Firms reported higher new orders from customers across various Asia Pacific destinations, including Australia, the Philippines, and Vietnam.

• Furthermore, manufacturers showed little interest in maintaining extra stock at the midway point of the year. In June, purchasing activity, stocks of inputs, and post-production inventories were all reduced.

• Firms were generally content to maintain steady employment levels due to a lack of pressure on capacity. Backlogs of work decreased for the twenty-fifth consecutive month, though the increase in new orders meant the rate of depletion was only slight and the slowest since February.

• Higher raw material costs and unfavourable exchange rate fluctuations led to another rise in input prices. The rate of inflation remained solid and unchanged from May. Although the pace of cost inflation was stable, firms increased their selling prices at a faster rate, marking the quickest rise since September 2022.

Outlook

• The average reading for the second quarter of the year was the highest since the third quarter of 2022, indicating a potential improvement in economic growth over this period. The data also suggests that the recent solid expansion, as indicated by official manufacturing production data, has continued beyond April. The average PMI for 2Q 2024 was 49.7, compared to 49.0 in 1Q 2024.

• Moreover, insights from S&P Global suggest the PMI data have represented an improvement relative to the opening part of the year, boding well for upcoming official data prints. In addition, historical relationship between PMI and official data indicating an upward trend in both GDP and manufacturing production, pointing towards improvement in the second 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 61.8%, 60.8%, and 44.1%, respectively. Manufacturing segment in GDP may increase by 2.8% YoY in second quarter (1Q24: 1.9% YoY).

• Looking ahead, sustained growth in new orders is expected over the coming year, bolstering optimism for the outlook of manufacturing production.

Source: TA Research - 2 Jul 2024