Malaysia factory output shrinks for 18th month, BNM may cut rates, says HSBC Research


  • Economy
  • Friday, 30 Sep 2016

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KUALA LUMPUR: Malaysia's manufacturing Purchasing Managers' index (PMI) contracted for the 18th straight month in September, though at 48.6, this was the highest reading since January 2016.

HSBC Global Research said on Friday weak external demand remained a major drag, with new export orders sinking further and this could see Bank Negara Malaysia (BNM) reducing the Overnight Policy Rate (OPR) by another 25 basis points in its November meeting.

Its co-head of Asian economic research Frederic Neumann pointed out overall new orders dropped as well, albeit as a slower pace than before. 

“Encouragingly, employment in the Malaysian manufacturing sector is showing signs of stabilisation. 

“Manufacturers also continue to face margin pressures, with the rise in input prices accelerating sharply, the highest in the survey history, and outpacing gains in output prices,” he said.

Neumann added the Markit manufacturing PMI data showed that three of the five PMI components that constitute the headline reading - output, new orders and stocks of purchases - contracted in September.

He said the surveyed companies mentioned the "fall in total new orders and an unstable economic climate" as being responsible for the continued fall in output. 

On the price front, input prices again surged, the joint highest in the series' history. It noted that respondents cited "higher raw material prices, unfavourable exchange rates and an increase in the sales tax" as major reasons for the rise in costs.

On the other hand, output prices rose at a softer pace in September, implying an ongoing margin squeeze.

“The PMI survey continues to suggest that manufacturing conditions in Malaysia are still weak, and that a recovery any time soon remains elusive.

“Worryingly, in contrast to the prior two months, overseas demand for Malaysian manufactured goods declined in September, with new export orders contracting at the sharpest pace in three months. This suggests that the tail-wind from the depreciation of the ringgit is fading for Malaysian exporters. 
 
“Meanwhile, the (negative) gap between input and output prices widened further, suggesting that profit margins for Malaysia's manufacturers remain under pressure. In the coming months it is unlikely that this gap will narrow meaningfully, as soft local demand constrains the pricing power of companies,” he said.

HSBC Global Research said the manufacturers have at the margin expanded payrolls again last month, at last some good news after two months of job shedding. 

Manufacturing is the country's largest employment sector alongside the wholesale and retail sectors. In general, however, labour market conditions remain soft, pushing the unemployment rate gradually higher (to 3.5% in July).
 
Neumann pointed out that unfortunately there is only so much the central bank and government can do to address the domestic slowdown. 

The government's recalibrated 2016 budget will not provide any additional fiscal impulse, with the budget deficit to GDP ratio maintained at 3.1% of GDP versus an estimated 3.2% of GDP for 2015.

“Although there will be more cash in the pockets of workers thanks to the reduction in pension contributions and a special tax relief, given the weakness in consumer sentiment and labour market softness, it is likely that a large proportion of this cash will go towards precautionary savings rather than consumption.
 
“The recalibrated budget also did not directly address the softening employment outlook, channelling funds towards job retraining but not providing employers any incentives to retain staff. 

“An 11%-15% hike in minimum wages that came into effect on July 1 - as laid out in the original 2016 Budget - will also be an additional burden on firms, many of which are already grappling with excess capacity and still-high import costs (the ringgit is still weaker than last year, despite this year's recovery).
 
“This leaves the burden for stimulus on BNM, which remained on hold in the September meeting after having surprised in July with a 25bp cut. 

“However, as 'risks' to domestic growth continues to persist, BNM can, and should, deliver one more 25 basis point cut in November, bringing the policy rate to 2.75%,” Neumann said.
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