External demand for goods remains weak

Kenanga Research said the weak external demand outlook in the near term was expected to extend the slowdown in manufacturing activity in the country.

KUALA LUMPUR: The continued slowdown in Malaysia’s manufacturing purchasing managers’ index (PMI) suggests the external demand for the country’s goods will likely remain weak in the near term.

This trend reinforces expectations that the country’s gross domestic product (GDP) growth will soften in the second half of 2023, according to several brokerages.

In its report yesterday, TA Research noted the persistent downward trend in PMI during the third quarter raises significant concerns, as it likely mirrored the performance of critical economic indicators, including industrial output, exports, and, ultimately, the GDP.

“Notably, there exists a meaningful correlation of 44.8%, 36.6%, and 46.1% between PMI, industrial output, exports, and GDP, respectively,” the brokerage explained.

“The observed relationship between manufacturing PMI and official economic statistics underscores the subdued economic conditions prevailing in the country. “This alignment suggests that the manufacturing sector, a crucial driver of economic growth, is facing challenges, and these issues are extending to other facets of the economy,” it noted.

The latest report from S&P Global Market Intelligence on Monday showed the manufacturing PMI fell to 46.8 in September from 47.8 in August.

It represented the 13th consecutive month of the index being below the 50-mark, which indicated contraction in the manufacturing sector.

For the third quarter of 2023 (3Q23), the average PMI stood at 47.5, down from 48.1 in the preceding quarter.

Year-to-date, the average manufacturing PMI stood at 47.8.

Based on the latest PMI data and a simple regression analysis using one variable, TA Research estimated GDP growth would reach 3.4% in 3Q23, marginally lower than its 3Q23 official estimate of 3.5%.

According to Kenanga Research, the weak external demand outlook in the near term was expected to extend the slowdown in manufacturing activity in the country.

“The lower manufacturing PMI reading in September reflects a persistent weakness in the manufacturing conditions amid weaker demand, mainly from the external sector.

“This is also partly due to the higher base effect recorded last year and as the economy returns to normalcy,” it explained.

Kenanga Research maintained its GDP growth would slow to 3.1% in the second half of 2023 (2H23) from 4.2% in 1H23. This was due to the high-base effect from 2022 as well as weak China’s post-pandemic recovery.

“This could be further weighed down by the impact of a higher interest rate environment among advanced economies.

“Nevertheless, growth is expected to be supported by resilient domestic demand amid stable capacity expansion and further improvement in the services sector,” it said.

For the full-year, Kenanga Research expected GDP growth to slow 3.5% to 4% in 2023 from 8.7% in 2022.

Meanwhile, MIDF Research noted that the continued sluggishness in the manufacturing sector was generally in line with the overall downturn in global external trade and manufacturing activities.

“We opine that the sluggishness in external trade will persist in 2H23, causing real exports of goods and services to contract by 5.3% in 2023, as compared to a growth of 14.5% in 2022,” the brokerage said.

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