Malaysia: Manufacturing PMI reaches five-month high but underlying demand dynamics remain weak
August 1, 2018
The Nikkei manufacturing Purchasing Managers’ Index (PMI), co-produced with IHS Markit, edged up from 49.5 in June to 49.7 in July, marking a five-month high. However, the index remained below the crucial 50-point threshold that separates expansion from contraction in the manufacturing sector.
July’s print came on the back of the first increase in output in the last five months and higher new export orders, thanks to stronger demand from major trading partners. As output rose, firms increased their payrolls. On the other hand, new orders dropped for the sixth consecutive month in July. Input prices—particularly of steel and fuel—rose, linked to the depreciation of the Malaysian ringgit. However, inflation was moderate overall, and output prices were broadly unchanged. Commenting on the price developments, Aashna Dodhia, economist at IHS Markit, said: “The abolition of the Goods and Services Tax in June continued to feed into PMI price data, as input cost inflation remained modest and broadly similar to June’s multi-year low.”
Business sentiment improved in July owing to an expected pick-up in demand levels and new projects. However, domestic policy uncertainty remained an issue, with firms voicing worries over the effects of the proposed Sales and Services Tax, which is set to replace the unpopular Goods and Services Tax (GST). The Pakatan Harapan coalition, which scored a surprise victory in the 9 May general election, promised to repeal and replace the GST during the election campaign. The Sales and Services Tax is expected to be reinstated effective 1 September.
Author: Jan Lammersen, Economist