By LYDIA NATHAN / Pic By BLOOMBERG

MALAYSIA’S manufacturing sector dropped to a three month low last month, as manufacturers faced a challenging business environment at the end of the first quarter (1Q).

The headline Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) posted 47.2 in March, down slightly from February’s reading of 47.6 and below the long-run survey average.

In a statement yesterday, IHS Markit said deterioration in the production trend commonly reflected tougher demand conditions, according to anecdotal evidence from the survey provided by PMI panel member companies, particularly in overseas markets.

“The latest PMI data indicated that Malaysian manufacturers continued to face a challenging business environment at the end of the 1Q.

“The large majority of firms (79%) reported no change in production, while just 12% reduced output,” it said.

The financial information services provider also said despite panellists reporting softer demand originating from trading partners in Asean, client orders from Germany and Japan had picked up.

“Nonetheless, total overseas sales fell during the latest survey period,” it said.

IHS Markit added that Malaysian goods producers focused on additional resources to clear outstanding business in March.

Efficiency gains had helped ease pressures on capacity, while some panel members credited backlog depletion to higher staffing levels, it said.

However, manufacturing employment was stable in March 2019 as hiring in some instances was offset by other firms reducing workforce numbers due to softer demand.

“Overall, 95% of panel members signalled no change to workforce numbers compared to February,” it said.

For the first time since December 2018, local manufacturers reported quicker average lead times on the delivery of inputs.

The rate of improvement in vendor performance remained the strongest in more than a year, albeit mild overall.

IHS Market chief business economist Chris Williamson said the survey is still broadly indicative of the economy growing at an annual rate of 4%-4.5%, with manufacturing output increasing at an annual pace of just under 4%.

“The PMI gauges have to drop much further below 50 to indicate either a contracting manufacturing sector, or a decline in GDP,” he said.

The local PMI has not breached the confidence level of 50.

Meanwhile, against challenges signalled by the latest data, Malaysian manufacturers reported the strongest degree of optimism towards future output in a year, which was supported by forecasts of improved sales, new projects and products, and successful new contract tenders.

Indices of purchasing and inventories consequently came off recent lows as companies started to plan for demand in coming months, Williamson added.