Manufacturing sector slowed down in September

by NUR HAZIQAH A MALEK / pic by ARIF KARTONO

MALAYSIA’S IHS Markit Ltd Purchasing Managers’ Index (PMI) for September slowed from August, the third month running following June’s rebound, driven by a loss of momentum in new orders.

The reading came in at 49.0 in September, moving down fractionally from 49.3 in August, as output moderates for the first time in four months. A reading above 50 indicates expansion, while a reading below signals contraction.

IHS Markit chief business economist Chris Williamson said some pullback in the recovery rate is always likely following the initial rebound from the global demand collapse at the height of the pandemic, and September saw a renewed deterioration in the production trend.

“However, historical comparisons indicate that the survey remains broadly consistent with both manufacturing output and GDP expanding at annual rates in excess of 4%.

“Moreover, the orderbook trend is showing signs of having bottomed out and future output expectations surged to the highest seen so far this year, as growing numbers of companies considered the worst of the crisis to be behind them,” Williamson said in the report.

On a more positive note, he said confidence in a gradual return to normality meant that business sentiment improved sharply to its highest in September since the start of the pandemic.

He said looking at the historical relationship between the PMI figures and official data, it shows that the latest reading is still representative of growth in both GDP and manufacturing production, albeit to lesser extents than in previous months.

“New orders continued to weaken in September, although the pace of moderation was the softest in 2020 so far. Total new business was again negatively impacted by a reduction in new export orders amid ongoing Covid-19 disruption,” he said.

Due to the slowing down of new orders, manufacturers were also scaling back in output for the first time in four months, which were reflected in staffing levels and purchasing trends.

Similarly, employment decreased for the sixth month running and there is a solid reduction in input buying during the month, following the lack of change in the previous month.

The reduction in purchasing was fed through to lower pre-production inventory levels, in line with the scaled-back production requirements.

“Stocks of finished goods also dipped at the end of the third quarter (3Q). Despite capacity reductions, firms were still able to work through outstanding business amid ongoing weakness in new orders,” he said.

September also saw increasing confidence in the 12-month outlook for production as sentiment jumped to a nine-month high, with firms predicting improvements in new orders.

“Input costs increased for the fourth successive month at the end of the 3Q, often reflecting raw material shortages. Some respondents specifically mentioned higher prices for imported items. The rate of inflation was solid and broadly in line with the series average,” he said.

Williamson said any efforts to pass on higher input costs to customers were hampered due to weak demand, and such manufacturers raised selling prices only slightly, marking the fourth consecutive rise in charges.

The report also noted that the pandemic has affected global supply chains as vendor delivery times lengthened to a solid extent.

“Issues with the shipping of items and delays linked to restrictions in certain countries were mentioned by those firms that saw lead times lengthen,” Williamson said.