Hope is not lost for manufacturers

Demand to improve in the coming quarters

“malaysia’s production capacity will eventually rise to cater to high demand, thus leading to a better performance in trading activities.” Firdaos Rosli

PETALING JAYA: As the Malaysian manufacturing sector kicked off the new year with its weakest output performance in 16 months, concerns arise about the future of the sector, which makes up almost a quarter of the domestic economy.

With the rising recessionary fears in advanced economies being a key risk, some also worry that a softer export demand ahead may prolong the slowdown in manufacturing activities, which in turn could water down the country’s economic growth.

Headwinds aside, economists are hopeful that Malaysia’s manufacturing production will eventually recover in coming quarters.

The optimism is premised upon a resilient domestic demand and the positive spillover effect from China’s reopening.

Malaysian manufacturers are also “increasingly optimistic” on the outlook for 2023, according to S&P Global.

S&P Global, which publishes the monthly manufacturing Purchasing Managers’ Index (PMI), said manufacturers expect both domestic and external demand conditions to improve as global macroeconomic headwinds dissipate ahead.

“The overall level of confidence rose to the strongest since August 2019 as a result,” it said in an earlier note.

The seasonally adjusted PMI dipped from 47.8 points in December 2022 to 46.5 points in January 2023, indicating a sustained gradual slowdown in manufacturing production and gross domestic product (GDP) growth into the new year.

It is noteworthy that the PMI fell for the fifth straight month in January.

The weaker headline figure was in part due to a stronger moderation in output volumes that was the steepest reported for 16 months.

“Firms commonly attributed muted production to subdued incoming orders,” said S&P Global.

Speaking with Starbiz, Bank Islam Malaysia Bhd chief economist Firdaos Rosli believes that Malaysia’s manufacturing output will go up in the coming months amid China’s reopening news, which will drive demand and ease supply chain pressures.

However, he acknowledged that it will take “a bit more time” to reverse the current trend.

“Malaysia’s production capacity will eventually rise to cater to high demand, thus leading to a better performance in trading activities.

“For the record, we are pencilling in Malaysia’s GDP growth for 2023 to come in at 4.5% sans the positive impact of China’s economic reopening and subsidy rationalisation,” he said.

Firdaos highlighted that the International Monetary Fund had recently revised its global GDP forecast from 2.7% to 2.9% for 2023.

This is in anticipation of softer inflation coupled with the US dollar weakness that could support the global economic outlook.

“Sentiment among business owners or manufacturers could be higher in the immediate timeframe. As such, the right thing for the government to do is to ensure that our overall growth is sustained amid external challenges,” he added.

In a note issued yesterday, TA Securities Research said Malaysia’s pessimist PMI performance was in line with some regional peers such as Myanmar and Vietnam.

“Nevertheless, four of the seven Asean nations monitored by the (PMI) survey registered growth across their manufacturing sector in January, namely the Philippines (53.5 points), Thailand (54.5 points), Singapore (51.9 points) and Indonesia (51.3 points).

“As a result, Asean manufacturing firms reported an improvement in operating conditions at the start of this year (51 points),” it said.

TA Research noted that the economic conditions in the country remained muted, as challenging situations across the manufacturing sector limited demand and production at Malaysian manufacturing firms.

However, it expects a continued rise in demand, going forward, mainly due to China reopening, coupled with a sustained rise in domestic spending and business activities to support a resilient outlook.

“For this reason, we are sticking with our prediction that manufacturing in Malaysia will remain in the black this year, albeit at a slower clip,” it said.

Bank Islam’s Firdaos said Malaysia is not spared from the impact of global growth moderation, being the world’s 24th largest exporter.

He noted that other major exporting countries such as China, the United States, Germany, the Netherlands and Japan were all under 50 manufacturing PMI points in January 2023.

According to Firdaos, Malaysia’s manufacturing PMI seems to suggest the direction of other key economic indicators, notably the Manufacturing Industrial Production Index (IPI) and the Coincident Index (CI).

The IPI, on a month-on-month basis, peaked in June 2022 at 12.76% and has been on a declining trend since August 2022. The CI, a comprehensive measure of the overall current economic performance, appears to be following a similar trend as well, he said.

On global semiconductor sales, Firdaos said it has been in contraction for six straight months since June last year.

“We foresee that the trend could ease in the upcoming months with China’s economic reopening last month.

“We believe high input and operating costs amid prolonged supply-side constraints, such as elevated commodity prices and supply shortages, will remain the growth headwinds in the coming months,” he added.

Semiconductors represent an important area for the Malaysian economy.

In 2021, semiconductors formed 62% of Malaysia’s total electrical and electronics exports, amounting to Rm281.38bil.

Meanwhile, Kenanga Research said the latest manufacturing PMI reading signals a continued slowdown in the manufacturing sector, reflecting a weak start for the first quarter of 2023 amid subdued demand brought by uncertainty in the global economic outlook.

This was further pressured by the ongoing Russia-ukraine crisis and the impact of tighter financial conditions on the back of aggressive monetary policy tightening by global central banks.

“Therefore, we maintain our GDP growth projection for 2023 at 4.3%, which reflects a sharp moderation from the 8.6% estimated in 2022.

“Nevertheless, we still expect manufacturing growth to remain on a positive expansion albeit at a slower pace, primarily supported by the continued domestic demand and to benefit from China’s economic reopening,” it said in a note.