Bimb Research Highlights

Economic - Muted Malaysia’s Manufacturing Amid Slower Inflation

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Publish date: Fri, 03 Jan 2025, 05:15 PM
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Bimb Research Highlights
  • ASEAN manufacturing recorded modest gains
     
  • Malaysia's PMI slipped to 48.6 in December
     
  • Price pressures picked up in most ASEAN nations toward year-end
  • China manufacturing growth persisted

OVERVIEW

The ASEAN manufacturing sector recorded slight growth at year-end, with December's headline PMI reaching 50.7, above the neutral mark of 50.0. This growth was driven by gains in Indonesia (Dec: 51.2; Nov: 49.6), Philippines (Dec: 54.3; Nov: 53.8) and Thailand (Dec: 51.4; Nov: 50.2). However, the region's overall performance was offset by contractions in Malaysia (Dec: 48.6; Nov: 49.2) and Vietnam (Dec: 49.8; Nov: 50.8).

Indonesia’s manufacturing rebounded in December, driven by improved sales and output, with optimism for 2025. Employment rose, but rising cost pressures and inflation require close monitoring. The Filipino sector saw strong growth in output and new orders, marking the highest growth since April 2022, while price pressures eased. In Thailand, new orders and backlogs rose, though purchasing slowed, and output prices fell amid delays and lower inventories. Meanwhile, Vietnam's manufacturing slowed, with reduced growth in production and new orders, as inflationary pressures intensified, and business confidence dropped to a 19-month low. Overall, most ASEAN nations experienced improvements in operating conditions and increased demand, but price pressures intensified toward year-end, largely due to exchange rate fluctuations.

China's manufacturing growth continued at the end of 2024, supported by a combination of existing policies and new stimulus measures introduced since late September. Both the official and Caixin PMIs indicated that manufacturing activity expanded for the third consecutive month in December. China's Caixin manufacturing PMI registered 50.5 in December, down 1 point from November, marking the third consecutive month of expansion (Nov: 51.5). Supply and demand both expanded, with manufacturers' output and demand continuing to grow as the market improved. The output gauge remained in expansionary territory for the 14th consecutive month, and total new orders rose for the third straight month. However, growth slowed as production and sales of investment goods declined. Similarly, the National Bureau of Statistics (NBS) reported that manufacturing PMI eased unexpectedly to 50.1 in December, down from November's seven-month peak and below the forecasted 50.3. This marked the third consecutive month of factory activity expansion, driven by Beijing's support measures initiated in early September. Output growth slowed to a four-month low (Dec: 52.1; Nov: 52.4), while new orders increased at their fastest pace since April (Dec: 51.0; Nov: 50.8). The combination of existing policies and new stimulus measures has positively influenced the market, fostering stability and progress toward this year's goals. However, challenges persist, such as weak domestic demand and increasing unfavorable external factors. With a more complex external environment ahead, proactive policy adjustments are essential. Future efforts should prioritize boosting household income, improving livelihoods, and enhancing the spending capacity and willingness of socially disadvantaged groups.

Analysis: Malaysia December Manufacturing PMI

In December, Malaysia's manufacturing sector continued its subdued trends, with weak demand and a modest production cut, marking the steepest decline in a year. Simultaneously, demand conditions in international markets worsened for the first time since March. The PMI slipped to 48.6 (Nov: 49.2), remaining below the neutral level for the seventh consecutive month, signaling a modest slowdown in Malaysia's manufacturing sector, the most pronounced since March. Further evidence indicated that the coming months are likely to remain muted, as manufacturers reduced purchasing activity and drew down stocks of purchases and finished goods due to a lack of new orders. There was also a continued depletion of outstanding business, the strongest in eight months, as firms worked through existing orders amid weak demand. On a positive note, input price inflation slowed sharply, marking the weakest rise in the current 55-month streak of increasing costs, which led to only a slight increase in output charges.

Outlook

At the end of 2024, Malaysia's manufacturing sector faced pronounced headwinds, marked by weak demand and scaled-back production. The December manufacturing PMI fell to 48.6 from November’s 49.2, marking its lowest level since March and remaining below the neutral 50.0 threshold for the seventh consecutive month. This points to sustained contraction, with international demand conditions deteriorating for the first time since March. In response to subdued order volumes, manufacturers reduced purchasing activity and drew down inventories of both raw materials and finished goods, signalling cautious sentiment heading into 2025.

In stark contrast, the broader ASEAN manufacturing sector displayed resilience, with the December PMI at 50.7, slightly down from November’s 50.8 but maintaining expansionary momentum throughout 2024 (average PMI: 51.0). Growth in Indonesia, the Philippines, and Thailand offset contractions in Malaysia and Vietnam. Meanwhile, China’s manufacturing sector showed robust growth, with both official and Caixin PMIs reflecting expansion for the third consecutive month in December, further reinforcing the importance of a recovery in key global markets.

Despite these challenges, Malaysia’s manufacturing sector has the potential to stabilize in 2025. A global recovery in manufacturing, which reached a five-month high in November 2024 (PMI: 50.0, up from October's 49.4), could support Malaysia’s manufacturing activities and exports, provided stable economic conditions prevail in major economies such as the United States, the European Union, and China.

However, the outlook is not without risks. Geopolitical uncertainties, including possible disruptions to global supply chains, remain a key concern. Malaysia’s strong trade links with China mean its manufacturing sector’s recovery will heavily rely on robust growth there, though global challenges like supply chain disruptions and volatile commodity prices could hinder momentum.

The subdued global economic environment, especially in advanced economies, may continue to weigh on external demand for Malaysian exports. This could prolong downward pressure on the broader manufacturing activity. A potential return of Donald Trump to the U.S. presidency in 2025 could escalate trade tensions, especially if tariffs on Chinese goods are reinstated or expanded. These measures could disrupt Malaysia’s manufacturing sector, particularly industries deeply integrated into China-centric supply chains. However, Malaysia might gain from trade diversion opportunities if firms accelerate their adoption of the “China+1” strategy to diversify production bases. Malaysia stands to benefit from multinational corporations diversifying production bases away from China. This shift could spur investments in Malaysia’s electronics and electrical manufacturing sectors, as well as growth in industries such as automotive components and machinery. While electronics exports are poised to drive growth, they remain vulnerable to global technology cycles and supply chain disruptions. Sustained investments in the semiconductor and electronics sectors will be critical for capitalizing on opportunities arising from global trends like AI adoption. However, Malaysia’s ability to attract these investments will depend on its competitiveness relative to other ASEAN peers like Vietnam, Indonesia, and Thailand.

While challenges persist, Malaysia’s manufacturing sector has room for stabilization in 2025, supported by resilient electronics exports and opportunities from the “China+1” strategy. Domestic initiatives, such as wage hikes and consumer-driven policies under Budget 2025, are expected to stimulate local demand, further supporting the sector. However, the risks tied to shifting U.S. trade policies, coupled with weak global demand, underline the need for strategic efforts to attract investments and mitigate external vulnerabilities. For Malaysia’s manufacturing sector to achieve sustained growth, improvements in global demand, robust domestic support, and continued investment in high-value industries will be paramount.

Source: BIMB Securities Research - 3 Jan 2025

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