Q3 GDP seen tapering off

> Research house cautious after weakness in September’s manufacturing PMI

PETALING JAYA: Kenanga Research foresees a relatively precarious growth trajectory for Malaysia, with the gross domestic product (GDP) projected to taper off to 5.3% for Q3, given the weakness in September’s manufacturing purchasing managers’ index (PMI).

GDP grew 5.8% in Q2, the highest since Q1 2015.

Malaysia’s PMI fell below the 50-point threshold to 49.9 points in September due to lower domestic new orders. While the 49.9 reading suggests that business conditions are largely unchanged, September’s readings represent a disappointing retreat after prior optimism in August.

Following that, Kenanga Research remains cautious on manufacturing sector expansion moving into Q3.

“Our house forecast on 2017 manufacturing industrial production index (IPI) growth is 5.7% (2016: 4.3%; Q2 17: 6.2%). This will likely translate to a 5.3% manufacturing GDP growth (2016: 4.4%; Q2 17: 5.9%),” said Kenaga Research.

While respondents are likely to see a squeeze from higher cost-push factors along with flailing demand, as represented by falling new orders, Kenanga Research expects cost considerations to ease somewhat moving forward, in part from seasonal factors, hence placing a cap on cost growth.

“However, even if cost pressures ease, we are cautious if this will translate into any meaningful decline in output prices as margin protection remains a concern for manufacturers.”

Kenanga Research is also mindful that September’s decline in export orders might represent a one-off moderation, given relatively strong PMI readings globally, and to an extent, regionally.

However, the research house is cognisant of possible monetary tightening among the advanced market economies and some of the emerging market economies; a more bullish outlook tends to lend support to policy tightening initiatives.

“As such, we reiterate our reservations on further external growth support to the region and by extension, the Malaysia economy.”

Despite IHS Markit anticipating IPI to expand 4.6% for 2017, which is higher than the 3.8% in 2016, Kenanga Research noted that the manufacturing PMI may not necessarily reflect overall industrial production, which includes a mining and electricity generation component that accounts for 34.1% of the headline IPI.