Fall in new orders drags headline manufacturing index into minus territory

PETALING JAYA: The headline Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) – a composite single-figure indicator of manufacturing performance – dipped below the 50.0 no-change mark for the first time since July to signal worse business conditions than in the previous month.

The headline index fell to 49.2 in October, from 51.5 in September, indicating a mild rate of contraction in Malaysia’s goods-producing sector.

The deterioration in operating conditions was largely driven by a marked reduction in total new sales. Demand eased noticeably in October, with weakness arising from domestic markets and the recently implemented sales & service tax (SST).

However, new business from overseas increased at the sharpest pace in nine months. The US and countries in Southeast Asia were mentioned as destinations for new export orders.

With the overall level of new work declining, production at Malaysian manufacturers was cutback for the first time since June. However, the rate of decrease was only fractional, as outstanding business and new product launches encouraged some output growth in some instances.

Survey data pointed to an alleviation of capacity pressures at Malaysian manufacturing units in October. Incomplete workloads declined at a faster extent than in September, but the rate of depletion was only modest overall.

Despite falling incoming and existing order volumes, employment continued to rise, extending the current period of job creation to five months. Panellists indicated that new projects in the pipeline encouraged them to raise headcounts. However, the rise in staffing levels eased noticeably as some firms looked to reduce expenses.

Detrimental exchange rate movements, rising raw material prices and the SST were all cited as sources of cost pressures in October. Input price inflation quickened to the fastest in almost a year. In line with higher purchasing costs, buying activity declined for the first time since July. Output charges were raised in response, and to the greatest extent in six months, but weak demand restricted the overall rate of increase to only a slight pace.

Despite the negative start to the fourth quarter, firms expect output levels to lift over the coming 12 months. Planned expansion into new markets and stronger sales forecasts supported business confidence.

Commenting on the Malaysian Manufacturing PMI survey data, Joe Hayes, economist at IHS Markit, which conducted the survey, said data are showing the initial impact that the implementation of the SST is having on the real economy.

“At a time when global raw material prices are rising and the domestic currency is weakening, the SST introduction has fuelled a further month of sharp input cost inflation in Malaysia’s manufacturing sector.

“Aside from the demand-side impact of the SST, there were reports of general underlying market weakness hampering new business growth, which restricted the extent to which firms were passing through higher cost burdens to clients. Indeed, firms reduced both input buying and new staff hiring in October as part of efforts to curb costs.”

Nonetheless, Hayes said, export sales increased at the fastest pace in nine months, with neighbouring countries in Southeast Asia, supporting international demand for Malaysian goods.