PETALING JAYA: Economists are broadly upbeat about the manufacturing sector with the country’s S&P Global Purchasing Managers’ Index (PMI) touching 50.2 points in May this year.
The data represented the first time the PMI had breached the neutral 50-point mark in 20 months, signalling renewed improvement in conditions for the manufacturing industry after almost two years of moderation.
Simply put, a PMI is a number from zero to 100, and is an economic indicator composed of monthly reports and surveys of purchasing managers from manufacturing firms.
A PMI of above 50 represents an expansion, when compared with the previous period, while a PMI reading under 50 represents a contraction.
Executive director of the Socio-Economic Research Centre Lee Heng Guie said that the May PMI result was a positive lead, suggesting a revival in the country’s industrial activities, especially in the manufacturing sector.
“In the first quarter of 2024 (1Q24), the manufacturing sector rebounded to grow by 1.9% year-on-year from a contraction of 1.3% in 4Q23,” he noted.
Expecting the PMI to sustain readings of above 50 points in the months ahead, Lee told StarBiz that his optimism is premised on improved worldwide demand for electronics and electrical (E&E) products, and stronger domestic demand for construction-related building materials, transport equipment and food products.
On the other hand, Lee cautioned that Malaysia needs to remain mindful about the geopolitical risks that may dampen the global economy such as the ongoing conflicts in the Middle East and the new round of the tariff war between the United States and China.
“Additionally, domestic manufacturing companies also face cost pressures in response to the imminent implementation of the diesel subsidy rationalisation, which may impact the transportation cost,” he said.
Similarly, chief executive at the Centre for Market Education Carmelo Ferlito labelled May’s PMI as a “good, important and very welcome” signal.
On the flip side, he issued a reminder that it was important to see which components of the PMI – namely new orders, production, employment, supplier delivery times and inventories – had underpinned the index.
Delving further, he revealed: “Mainly, the expansion was due to a growth in new orders, ending 20 months of sluggish demand. Also, export orders rose the most in over three years, supported by strong demand from the United States, Europe, the Middle East and other parts of the Asia Pacific.”
Citing data from S&P Global, Ferlito further pointed out that employment had increased for the first time since the end of 2023, with the growth rate at the fastest in over a year, although buying levels decreased as firms remained prudent about their inventory holdings.
At the same time, the delivery time had lengthened marginally because of port congestion, while firms had raised prices due to an increase to input costs, nudging inflation up fractionally, he said.
A glance at the S&P Global report itself, released on Tuesday, also showed that the increased employment in May had enabled companies to work through their backlogged orders, as the level of unfinished business lowered modestly during the month.
Of interest, it said sentiment in the local manufacturing sector was shown to be positive midway through 2Q24, as better demand conditions in May inspired hopes of further improvements in the year ahead.
“That said, the level of confidence eased to a nine-month low and was below the series average,” the report noted, with associate director at S&P Global Market Intelligence Pan Jingyi acknowledging that this would be an area to monitor for further signs of a genuine rebound.
Like Lee, Ferlito thinks geopolitical factors will remain of primary interest and the most important cloud to monitor to determine if the PMI trend can be maintained.
He said: “The economy will continue to be driven by private consumption, but in 1Q24 we have seen positive signals on investments.”
While adamant that international factors will remain significantly critical, Ferlito is relieved that domestically at least, the economy appears to be on the right track.
“It is important for the government to build on this momentum with pro-market reforms so as to sustain the growth pace in the private sector, which currently is outpaced by the government sector,” he said.
HSBC Asean economist Yun Liu.Meanwhile, Asean economist at HSBC Yun Liu believes the 50.2 PMI reading in May signals the start of a technology cycle recovery in Malaysia.
Observing that both export orders and employment had received positive feedback during the month, she said the tech recovery has been fuelling the hopes of tech-exposed economies this year, although Malaysia has been trailing behind its peers.
Two reasons for the lagging are because Malaysia does not have direct exposure to artificial intelligence (AI)-powered chips, and because there was a mismatch in the timing of the recovery effects, she said.
“Malaysia’s electronics shipment stayed much more resilient than peers when they started to feel the pinch in 4Q22.
“We expect to see an improvement in the tech manufacturing sector to translate into a stronger boost to Malaysia’s growth in 2H24,” said Liu.
Notably, she is forecasting Malaysia’s gross domestic product (GDP) to accelerate to 4.5% in 2024.
Recognising that Malaysia’s manufacturing sector is closely linked to the country’s external performance, economist at Coface Nouri Chatillon said the twenty consecutive months of contraction in the domestic manufacturing sector were mainly due to the deterioration of the global trade cycle in 2023.
Concurring with the other economists, he told StarBiz: “Subsequently, as the global electronics cycle picked up, manufacturing activities in Malaysia have benefitted from the improved demand for E&E products.”
As to whether the manufacturing expansion can be sustained, he notably said this will depend on the development of external demand conditions faced by the country.
Echoing Liu’s thoughts, Chatillon said given Malaysia’s mid-downstream position in the electronic supply chain, it typically benefits from the upturn in the electronic cycle with a delay.
“As such, we expect improving global demand for electronics products to continue to support Malaysia’s manufacturing activity in the second half of the year,” he said.