Factory activities down in May

Demand weakens but employment in manufacturing sector up

PETALING JAYA: Weaker demand dragged the headline Nikkei Malaysia manufacturing purchasing managers’ index (PMI) to a contraction in May although employment in the manufacturing sector rose for the first time since January and price pressures eased.

The PMI, which gauges manufacturing performance through the orders that factories make for parts and raw material as well as inventory levels, declined to 48.7 in May, below the 50-level threshold indicating no-change, after expanding to 50.7 in April. The April expansion of the index was the first in two years.

IHS Markit Ltd senior economist Paul Smith said in a statement that the “latest data dashed hopes of a sustained manufacturing upturn in Malaysia, with the headline PMI returning to contraction territory”. He added that panellists reported weak demand both domestically and abroad, citing disappointing sales in nearby Asian economies.

“Simultaneous growth of production and new work in April had raised the prospect of an economic turnaround, but both returned to decline in May,” Smith noted, adding that there were some positives from the May survey with employment having rose for the first time in four months and firms remaining optimistic towards the 12-month outlook although the degree of positive sentiment was relatively muted.

The anecdotal evidence of reduced demand was reinforced by survey data with the seasonally adjusted new orders indec contracting below the 50-level threshold. “The latest fall marked a resumption of the trend seen for more than two years prior to April’s fractional expansion,” he said.

Smith cited lower new export work as a factor behind the decline in total new business. “There were reports of lower new orders in nearby Asian economies in the latest period. Singapore, Thailand and Indonesia were among those mentioned,” he added, with backlogs of work broadly unchanged as workin-hand volumes were dependent on incoming new orders.

At the same time, purchasing activity showed an identical trend to new orders in May. “Input buying dropped following an increase in the previous month, with the rate of decline only modest overall. Both pre- and postproduction inventories were depleted, with firms highlighting efforts to streamline stocks amid subdued client demand,” Smith said.

The data showed that output, new orders and purchasing activity all fell after having risen in the prior month with the PMI signalling a renewed deterioration in business conditions although the rate at which conditions worsened was only modest overall. Notably, output fell for the first time in four months during May and while it was only moderate overall, the rate of contraction was faster than the series average.

However, goods producers maintained positive expectations towards output in 12 months’ time, although the degree of optimism was relatively subdued. “Looking ahead, manufacturers were optimistic about their growth prospects. Higher sales, new projects and new product lines were expected to underpin output over the next 12 months. That said, concerns regarding the state of the economy and client demand remained evident,” Smith said but cautioned that optimism was lower than the average over nearly five years of data collection.

“On the price front, both input costs and output charges rose more slowly in May. That said, the respective rates of inflation were strong in the context of historical data, with companies citing the impact of adverse currency movements on import costs,” he said.