Malaysia: Manufacturing PMI reaches three-month high despite weak demand
July 2, 2018
The Nikkei manufacturing Purchasing Managers’ Index (PMI), co-produced with IHS Markit, rose sharply from 47.6 in May to 49.5 in June. The reading marks a three-month high and the first increase in the headline figure, following drops in the prior four months. However, the index remained shy of the crucial 50-point threshold that separates expansion from contraction in business activity in Malaysia’s manufacturing sector.
June’s reading reflected softer contractions in output and new orders compared to the previous month. Anecdotal evidence suggests that the decrease in output was primarily due to unfavorable economic conditions, while lackluster demand was the driving force behind the fifth consecutive monthly drop in new orders. Foreign demand weakened at the close of the second quarter, leading to a drop in new export orders. Weakening demand dynamics further led firms to lower purchasing activity, with input buying decreasing for the seventh month in a row.
Contrary to the developments in demand and output levels, payrolls continued to increase as Malaysian firms brought more staff aboard. However, the pace of job growth was marginal. Input costs continued to rise in June, extending the sequence of inflation to 41 months, although the increase was the weakest since March 2015. Higher input costs were not passed on to consumers, ending a 19-month streak of output price inflation and likely squeezing manufacturers’ profit margins. Regarding input costs, Aashna Dodhia, Economist at IHS Markit, commented that “there were some reports that the abolition of the Goods and Services Tax alleviated pressure on firms’ costs burdens”.
Despite weak domestic and foreign demand and possible pressures on profit margins, manufacturers retained a positive outlook for the year ahead and expected improved demand dynamics going forward. Confidence, however, eased to the weakest levels since October 2017.
Author: Jan Lammersen, Economist