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Economic Viewpoint 2 October 2015 Malaysia Manufacturing PMI Economics Kenanga Investment Bank Berhad [email protected] [email protected] T: 603-2079 1379 Leading indicator shows sixth month of contraction OVERVIEW The latest reading of the Nikkei Malaysia Graph 1: PMI & CEIC Leading Index Manufacturing Purchasing Managers’ Index 54 120 (PMI) in 53 115 operating conditions for the manufacturing 52 110 51 105 50 100 49 95 showed continued worsening sector, albeit at a slower rate. September headline PMI stood at 48.3, signifying a slower rate of contraction from 47.2 in August. Nevertheless, the index remained under the 50.0 level that separates expansion from contraction for the sixth month in a row. 48 90 Markit Global PMI 47 Markit Malaysia PMI 85 CEIC Malaysia Leading Index (RHS) The 3Q15 quarter has the lowest quarterly 46 Sep-12 average reading since the data was collected. Source: Dept. of Statistics, Kenanga Research Sep-13 Sep-14 80 Sep-15 Manufacturers scaled back on their production due to lackluster new orders and unfavorable economic conditions. The CEIC leading indicator also pointed to deteriorating economic conditions. It will prove to be a hurdle for the manufacturing sector to recover in coming months. The Nikkei Malaysia Manufacturing PMI is a new leading indicator published by Markit beginning July 2015. It is a composite of five measures of manufacturing performance, namely new orders, output, employment, suppliers’ delivery times and stocks of purchases. The September PMI reading of 48.3 marked the sixth consecutive month of contraction in manufacturing activity. A reading below the 50.0 level indicates contraction in activity. Poor sentiment towards domestic economy, continued depreciation of the ringgit against world major currencies, and waning domestic demand affected by Goods and Services Tax (GST) implementation in April likely contributed to the weak PMI reading. Among the sub-groups, new orders, output and stocks of purchases saw declines in September, albeit at a slower rate compared to August. Production still declined at a rate above the long run average of the series. This contributed to the weak PMI reading of 48.3 in September, which is lower than the average index reading of 50.0 at least in the past three years. PP7004/02/2013(031762) Page 1 of 3 Economic Viewpoint 2 October 2015 New orders suffered the seventh month of decline in September. On the contrary, new export orders pulled up the best performance, registering growth in September. Solid foreign demand has helped improve export orders performance, but the slow growth in export orders are likely caused by the global economic slowdown. Improving demand from overseas likely helped to support employment. Despite a fall in production, employment unexpectedly increased in September, the first increase since April. The increase was reported to be modest. Following lower new orders and production, stock of purchases fell further in September. Manufacturers Graph 2: PMI & CEIC Leading Index also faced inflationary pressure in their purchases, due to recent ringgit woes. This led to increasing charges as manufacturers tried to offload their rising cost burden. Markit Global PMI has managed to stay in expansion territory since December 2012. Among major economies, Japan PMI shows manufacturing maintaining expansion. the fifth Eurozone manufacturing growth consecutive has but month enjoyed at a of continued slower rate. Meanwhile, Caixin China Manufacturing PMI shows Source: Dept. of Statistics, Kenanga Research seven months of manufacturing contraction as the Chinese economy cools down. Outlook September Manufacturing PMI indicates a slower rate of deterioration in the manufacturing sector. However, the challenging domestic and worldwide economic conditions present a high hurdle for a recovery in coming months. An analysis of available Malaysia PMI data beginning July 2012 shows Malaysia PMI having a positive correlation with manufacturing output growth and manufactured goods export growth. We thus see the manufacturing contraction as indicated by PMI to be a sign of downward pressure to the country’s GDP growth in the 2H15. Nevertheless the slowdown in manufacturing output is in line with expectations of moderating GDP growth and widely expected slowdown of the exports of electrical & electronics (E&E) this year. Expectation of improvement in services, construction, mining and agriculture sectors would mitigate any shortfall from manufacturing’s contribution to GDP growth. At this stage the worsening of PMI readings do not warrant a revision to our GDP forecast. The CEIC Malaysia Leading Index also points to a bleak outlook for Malaysia manufacturing sector. The CEIC index has fallen to 83.1 in August. This supports our expectation of contraction in the coming months. PP7004/02/2013(031762) Page 2 of 3 Economic Viewpoint 2 October 2015 Table 1: Malaysia Industrial Production Trend (2010=100) 2013 2014 Sep14 Apr15 May15 Jun15 Jul15 Aug15 Sep15 JanSep14 JanSep15 50.3 51.2 51.0 48.8 49.5 47.6 47.7 47.2 48.3 51.1 48.9 New Orders* Down Down Down Output* Down Down Down Employment* Down Down Up Suppliers’ Delivery Times* Down Down - Stocks of Purchases* Down Down Down Markit Malaysia PMI Markit Global PMI 51.3 52.3 52.2 51.0 51.3 51.0 51.0 50.7 50.6 52.5 51.2 CEIC Leading Indicator 102.1 102.5 99.4 87.9 90.4 90.2 89.6 83.1 - 103.4 - DoS Leading Index 116.0 117.8 118.9 118.6 117.2 117.6 118.6 - - 117.4 - Source: Markit Economics, CEIC, Dept. of Statistics, Kenanga Research *The “Up/Down” movements for sub-indicators are based on Markit’s own reports. Detailed and historical data is available on a subscription basis only. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: http://www.kenanga.com.my PP7004/02/2013(031762) Chan Ken Yew Head of Research Page 3 of 3