Slower manufacturing activity ahead

Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid

PETALING JAYA: The outlook for the manufacturing sector for the rest of the year is not so promising, which could be a dampener for the domestic economy already impacted from various fronts.

The slowing global economy, recessionary and inflationary risks and high interest rates are factors currently weighing on the local economy. Economists said to an extent, the outlook of the manufacturing sector would also hinge on the global demand conditions. They concurred that slower manufacturing activities would have an impact on economic growth.

As of last year, the manufacturing sector accounted for 24% of the nation’s gross domestic product (GDP).

Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid told StarBiz the outlook for the global economy has gradually become more challenging.

“What we are seeing now is the effect of past global interest rate hikes to the real economy. Typically, the lag effect of monetary policy to the real economy is about 18 months.

“In that sense, the global tightening condition would have a material effect towards the second half of the year and in 2024.

Therefore, we need to be prepared for any possible outcome to the global growth which will have a direct impact to the Malaysian economy,” he said.

The contraction in the latest S &P Global Malaysia manufacturing purchasing managers’ index (PMI) indicates slower economic activities going forward. Manufacturing PMI is a measure of the prevailing direction of economic trends in manufacturing.

The index fell slightly to 47.7 in June from 47.8 in May to indicate a 10th consecutive moderation in operating conditions that was the strongest since January this year. A reading above 50 signals expansion while below 50 indicates contraction.

UCSI University assistant professor in finance Liew Chee YoongUCSI University assistant professor in finance Liew Chee Yoong

UCSI University Malaysia assistant professor of finance Liew Chee Yoong said the manufacturing PMI has experienced a contraction for the last 10 months, with the highest fall in June.

This contraction shows a drop in manufacturing activity and indicates a challenging environment for the sector.

Factors such as output shrinkage, drop in new orders and concerns regarding the timing of recovery have contributed to the contraction, he noted.

“Considering these factors, we can expect that the contraction of the index may continue for the remainder of the year, unless there are significant improvements in the underlying factors affecting the sector, said Liew, who is also a research fellow at the Centre for Market Education.

He said slower manufacturing activities could have a significant impact on the country’s economic growth for 2023.

He said the manufacturing sector plays a crucial role in Malaysia’s economy, contributing to employment, export earnings, and overall economic output.

Liew said a slowdown in manufacturing activities can lead to reduced production, lower demand for goods, and potential job losses, which can slow down economic growth.

“Furthermore, the manufacturing sector is linked with other sectors of the economy, such as services and trade, which can further amplify the impact.

“Weaker manufacturing activities can result in reduced demand for raw materials, components and other intermediate goods. This can affect other related industries and supply chains linked with it.

“Overall, slower manufacturing activities can reduce Malaysia’s economic growth by reducing output, employment and business activity.

Bank Negara’s official estimate for the GDP is in the range of 4% to 5% for this year. Both the economic and financial data are signalling weaker quarters ahead for the local economy, which grew by 5.6% year-on-year in the first quarter of the year (1Q23).

On the manufacturing front, Liew expects businesses in the computers, electronics and optical products category to experience slower growth this year.

Afzanizam said whether the manufacturing PMI would continue its contraction mode depends on how the global economy would fare as Malaysia’s manufacturing sector is highly influenced by the global demand.

Thus far, he said the main barometer such as the US ISM Manufacturing Index has been trending lower to 46 points in June.

“So it’s likely that Malaysia’s PMI would move in the same direction given that Malaysia’s export and Industrial Production Index (IPI) growth are positively correlated with the US ISM Index,” he said.

The US ISM Manufacturing Index is a diffusion index summarising economic activity in the manufacturing sector in the United States.

Thus far, he said the IPI for the manufacturing sector has been growing at a slower pace which is in tandem with the PMI trend. The IPI for manufacturing grew by 2.4% for the five months of 2023 against 6.4% growth in the same period last year.

Similarly, the exports for manufacturing sector fell by 1.5% for the first five months against a growth of 19.5% in the same corresponding period last year.

“As such, we believe manufacturers will be cautious in their business planning, especially in production as they want to avoid excessive build up in inventory. In the process, they may not want to accelerate their demand for workers.

“We have already seen total employment growth in the manufacturing sector has been growing at a slower rate to 2.6% year-on-year in May 2023 from as high as 4.1% in June 2022. In that respect, slower manufacturing activites would lower the demand for labour,” Afzanizam added.

He expects external trade and trade oriented business to be affected as well due to the weaker manufacturing activities this year.

“If we look at the share of manufacturing sector in Malaysia’s total export, it accounted for 84.9% as of May this year. Therefore, if manufacturing activities become lethargic, it will have direct consequences to the overall exports.

“Similarly, manufacturing import accounted for 83.8% in May this year. So manufacturing is extremely instrumental in driving the nation’s trade,” he noted.

OCBC Bank economist Lavanya VenkateswaranOCBC Bank economist Lavanya Venkateswaran

OCBC Bank economist Lavanya Venkateswaran said there are few signs that the manufacturing sector would turn around in the near-term.

She said this is because external oriented manufacturing production is likely to stay weak given anaemic global demand conditions and fading commodity tailwinds.

Hence, she said it is likely that the manufacturing PMI would be in a contractionary territory for the rest of the year.

“We have factored in weaker manufacturing activities for the rest of the year into our baseline forecasts. That said, some of the weakness in the sector will be offset by still resilient services sector on account of higher tourism inflows.

“The electronics, and specifically semiconductors, sector has been the weakest link for manufacturing this year. While our baseline is for the semiconductor sector to bottom out in the fourth quarter, there is risk that this could be pushed into early 2024.

“Our forecast is for 2023 GDP growth to slow to 4.4% year-on-year (y-o-y) from 8.7% in 2022. This implies weaker growth of 4.1% in the second to the fourth quarter of this year from 5.6% in the first quarter,” she noted.

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