PMI breaks 50.0 point threshold for the first time in two years
KUCHING: The Nikkei Malaysia Manufacturing Purchasing Managers’ Index ( PMI) has broken the 50.0 threshold for the first time since March 2015 with a headline reading of 50.7 points in April 2017.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the reading suggested a turning point for business sentiments in Malaysia or a resurgent of the economy as it represented the first expansion in the manufacturing sector in two years.
“The optimism implied by the PMI was largely driven by improvements in the output and new orders sub- index,” explained the research arm.
Improvements in the output sub- index were observed for its third consecutive month and were accredited by the research arm to a combination of new project start- ups and new orders.
While the new order index rose for the first time in 25 months and was attributed largely to growth in new export orders, indicating renewed business sentiment in Malaysia from foreign buyers.
The local market however, did not seem to share the optimism as domestic orders saw no marginal improvement and remained continuously anaemic.
Despite the increase in new orders, productivity in the manufacturing industry did not lose steam as output volume in April continued to outpace new orders.
“The interplay of these factors led to an overall reduction in the backlog of outstanding working – indeed, back log fell for the first time in 2017,” the research arm mused.
Additionally, the Industrial production Index ( IPI) and export levels were also observed to have grown in tandem with the above- 50 PMI level.
IPI growth in February saw a 4.7 per cent increase month over month (m-o-m) while export levels in February saw a 26.5 per cent increase m- o- m.
“This, along with the overall improvements in regional peers in Southeast Asia and Asia alike, justifies a more aggressive growth target for the first quarter of 2017 (1Q17) from our former 4.4 per cent growth forecast,” said the research arm.
Taking into account the sharp rebound in palm oil production this quarter, Kenanga Research affirms its belief that Malaysian economy is picking up pace by revising its 1Q17 gross domestic product (GDP) growth estimate upwards to 4.8 per cent.
While it is optimistic news that our local economy is headed for better growth in FY17, the research arm warns that a consequence to this improvement is higher demand pull inflation whereby the economy will compete to purchase our limited amount of goods.
Should this occur, it may prompt Bank Negara Malaysia ( BNM) to exercise its tightening bias and strengthen its case for a rate hike in the near future.
“But for now, core inflation figures appear to be subdued overall at 2.5 per cent and as such we do not see any immediate need for BNM to raise the OPR above the prevailing 3.0 per cent.”