Manufacturing recovery continues on slight bumps
Business confidence strengthens to four-month high
PETALING JAYA: Green shoots are appearing in the domestic manufacturing sector as factory activity in June 2020 entered into the expansion territory for the first time since September 2018.
While most economies in Asia witnessed a recovery in their manufacturing activities at varying speeds, Malaysia was one of the few to stage an expansion in June as domestic manufacturing continued to rebound after a major slump in the Purchasing Managers’ Index (PMI) in April.
Economists who spoke to Starbiz remain positive on the local manufacturing outlook, although they cautioned that the road ahead could be bumpy as uncertainties continue to linger, domestically and globally.
Looking ahead, research firm IHS Markit said that Malaysia’s manufacturing business confidence strengthened to a four-month high as firms became increasingly confident that production would rise from its present levels in the year ahead.
There were encouraging signs that demand conditions were beginning to stabilise during June, IHS Markit’s New Orders Index for Malaysia rising to a six-month high.
“The re-opening of certain industries reportedly led new work intakes to improve. That said, overseas demand remained particularly fragile, weighing down on total order book volumes,” stated the research firm.
It is worth noting that Malaysia’s manufacturing PMI, compiled by IHS Markit, rose to 51 index points in June, as compared to 45.6 in May.
The index, which is an important indicator of manufacturing performance, indicates an improvement in the health of Malaysia’s goods-producing sector and stronger economic growth more generally.
For context, the PMI fell to its alltime survey-low of 31.3 in April as the containment measures for the Covid-19 pandemic ground manufacturing activities to a halt.
For the month of June, Malaysia – and Vietnam – are the only countries out of the seven Asean economies covered by IHS Markit to record a PMI of above 50.
A PMI above 50 represents an expansion when compared with the previous month while a PMI reading under 50 represents a contraction.
Commenting on the latest PMI results for Malaysia, IHS Markit chief business economist Chris Williamson pointed out June’s output rose at a rate unsurpassed in the survey’s eight-year history as increasing numbers of firms reopened facilities or raised factory operating capacity after Covid-19 related disruptions.
“However, a sustained recovery is by means assured, and growth could easily lose momentum after the initial rebound.
“While business expectations continued to improve in June, confidence remains well below levels seen at the start of the year, in part reflecting worries about the impact of ongoing Covid-19 restrictions on demand, both at home and abroad.
“Weak export demand remains a particular concern, especially in terms of subdued consumer spending.
“For now though, the data are moving strongly in the right direction and, barring any second waves of infections, a recovery is evident,” said Williamson.
Lee Heng Guie, executive director of Socio-economic Research Centre, told Starbiz that the improved PMI performance of Malaysia was in line with his view that the sharpest shock to industrial activity from the coronavirus crisis will be concentrated in April-may and will start to recover gradually, as the coronavirus impact wears off going into the third quarter of 2020.
“We expect the PMI to sustain above 50, albeit unevenly in the coming months, supported by a gradual pick-up in domestic activity and external demand.
“While we continue to expect a gradual recovery in the PMI, it could be a bumpy one and slip back into contraction if our major trading partners such as the US and Europe have the occurrence of a second wave of coronavirus, compelling more restriction of mobility and hence, dampen their consumer spending,” he said.
On the outlook of the country’s exports, which is a key catalyst for the manufacturing sector, Lee believes that the contraction in exports will continue throughout the year.
For perspective, Malaysia’s exports plunged 25.5% year-onyear (y-o-y) to Rm62.7bil in May due to the Covid-19 pandemic, marking its biggest fall since May 2009.
This was the second consecutive month of a double-digit drop for exports after a 23.8% y-o-y drop to Rm64.9bil in April.
Lee expects the second quarter to register the worst magnitude, as global demand remains depressed by measures to curb the ongoing coronavirus outbreak.
“The magnitude of declines will narrow markedly going into the second half of 2020, thanks to some improvement in global demand following the lifting of the ‘Great Lockdown’ in major advanced economies starting June,” he said.
Meanwhile, MIDF Research economist Mazlina Abdul Rahman did not think that the PMI for Malaysia would sustain above 50 or in expansionary territory, even as she foresees continuous improvement in the manufacturing sector in the upcoming months.
“In fact, in the past, the PMI barely sustained above 50. As long as it hovers between 49 and 50, it’s still considered good for Malaysia’s case and even that will depend on how the economy is doing both locally and globally,” she said.
According to Mazlina, while domestic economic conditions remain supported, there are still multiple headwinds on the global front, including a new wave of the pandemic and escalation of the Us-china trade feud which are downside risks to the estimate.
“While China’s recovery is somehow stable, providing support to our performance as China is our largest trading partner, other trading partners are not doing so well yet.
“Malaysia’s exports to China continued recording growth for the second straight month as of May 2020 but declined for other key trading partners.
“Hence, we foresee the PMI hovering between 47 and 50 in the upcoming months, but are not looking at a double-dip scenario in the near term, as the second wave of the pandemic in key trading partners such as China and South Korea are still under control and Malaysia has so far been spared from it,” she said.