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Manufacturing downturn eases sharply during May

01 Jun 2020 / 12:09 H.

PETALING JAYA: Malaysia’s manufacturing sector showed signs of approaching stabilisation midway through the second quarter, with rates of reduction in output, new orders and employment all easing considerably.

Nevertheless, in each case, survey data showed further marked declines as the global Covid-19 pandemic and the associated measures taken to stem its spread led to severe supply chain disruption and extended factory shutdowns.

The headline IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI) rose sharply to 45.6 in May, from April’s survey-record low of 31.3. Despite such a large month-on-month rise in the headline figure, it remained below the neutral 50.0 mark and was therefore indicative of a further deterioration in manufacturing sector conditions. That said, the latest decline was considerably weaker than at the start of the second quarter.

Latest survey data pointed to a further reduction in manufacturing output across Malaysia, although the rate of contraction eased substantially since April. The downturn lost strength amid reports that some firms had restarted production following a partial lifting of lockdown rules. Nevertheless, there remained widespread mentions of extended factory shutdowns and further production cutbacks in response to the pandemic.

New orders placed with Malaysian goods producers continued to fall during May, which panel members attributed to the ongoing measures both domestically and overseas to stem the spread of the coronavirus. The deterioration in demand was solid, although significantly weaker than seen in April. Of the minority of companies that recorded sales growth, clients reopening their businesses had led to new work intakes.

Weak export demand persisted in May, weighing heavily on overall order books. Where a decline in overseas sales was reported, this was linked to unfavourable economic conditions at key trade partners.

Supply-side hindrances remained unprecedented in May and continued to disrupt Malaysia’s manufacturing sector. Input delivery times lengthened markedly and to an extent which was similar to April’s record. Labour shortages at vendors, transportation restrictions and the extension of the movement control order were all reported to have contributed to the sharp lengthening in supplier lead times.

Purchasing activity declined sharply in May as a result of delayed shipments and lower production requirements. This led to a further marked drawdown of pre-production inventories. In both cases, however, the rates of reduction were much softer than seen in April.

Meanwhile, manufacturing employment in Malaysia was held broadly stable during May, with 98% of firms signalling no change in their payrolls. This contrasted with April, where staffing numbers fell at the fastest rate on record.

Looking ahead, there were signs of optimism as survey data pointed to a rise in business confidence. The Future Output Index rose to a three-month high, with stronger sentiment underpinned by expectations of a recovery in demand. Firms hoped that this would drive production volumes higher in the coming months.

Commenting on the latest survey results, IHS Markit chief business economist Chris Williamson said a strong rise in the PMI provides the first major indication that the economic downturn caused by the pandemic appears to have bottomed out.

“While manufacturing activity continued to fall at a steep rate in May, declines in output and order books were notably less severe than seen in April. Barring any second wave of infections, the coming months should see signs of at least stabilisation as restrictions to contain the virus are gradually eased both at home and in export markets.

“While we may see a return to growth as we head into the third quarter, it still looks like a recovery to pre-pandemic production and GDP levels will be long and slow. Export demand in particular looks set to be weak for some time as Covid-19 restrictions will inevitably need to stay in place and continue to dampen economic activity around the world.”

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