Better August manufacturing may be a blip — experts

This article first appeared in The Edge Financial Daily, on September 4, 2018.
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KUALA LUMPUR: The improved manufacturing conditions, as reflected in the Nikkei Purchasing Managers’ Index (PMI), which hit 51.2 in August ­— the first time in seven months — could be just a blip, according to economists contacted.

The global trade tension is expected to have an impact on the manufacturing industry.

“I don’t think this is the trend as the US and China trade war continues. There could be an impact on manufacturing, especially export-oriented industries. The index could come back down, so this [August index] is probably a blip,” said RHB Research Institute Sdn Bhd chief Asean economist Peck Boon Soon.

Peck said the impact from tariff on US$50 billion (RM206.5 billion) in China imports to US is “quite manageable” [for now] because it only constituted 2% of China’s total export but if US decides to impose tariff on an additional US$200 billion of Chinese goods, it could affect the global gross domestic product (GDP).

“So going forward, we could feel the impact in 2019 when global growth start to slow down. Trade war worsens the situation and investors could become risk-averse and turn away from emerging economies,” he told The Edge Financial Daily.

Global information provider IHS Markit Ltd, which compiles the survey, said the PMI rose to 51.2 in August from 49.7 in July, adding that on the price front, input cost inflation eased to the slowest since February 2015.

“The August data signalled an improvement in manufacturing conditions for the first time in seven months against a backdrop of improved demand conditions, indicated by the fastest gains in both output and new orders since November 2017,” its economist Aashna Dodhia said.

She said the PMI price indicators revealed an easing in inflationary pressures in August, which may helped to boost customers’ purchasing power.

“Indeed, output charge inflation was only fractional as input cost inflation moderated to the weakest since February 2015, reflective of the abolition of the goods and services tax,” Dodhia added.

Malaysian manufacturing firms raised their purchasing activities for the first time in nine months due to stronger demand and building initiatives by manufacturers ahead of the sales and services tax.

She found that the business sentiment on the 12-month outlook for output strengthened to a four-month high, with confidence rooted in positive forecasts of sales and an expected improvement in underlying demand.

AmInvestment Bank Bhd head and chief economist Anthony Dass said the improved PMI indicated that GDP for the third quarter for 2018 (3Q18) could be better but it is too early to draw conclusion on future trend.

 Dass told The Edge Financial Daily that although 3Q18 GDP is expected to be better, the research house has revised its full-year GDP to range between 4.8% and 5% from 5.3% to 5.6% previously. The revision came after the 5% growth for the first half year of 2018 (1H18) was released last month.

“However, we believe [the economy would benefit] from the build-up in inventory and the tax holiday from June to September, fuel subsidy, retention of the interest rate and falling inflation.

 Sunway Business School economics professor Dr Yeah Kim Leng holds positive view saying that the PMI for August was good and reflected the manufacturing condition in the subsequent three months.

“It shows that the trade war does not affect the underlying demand [for imports]. We expect Malaysian exports to continue on the back of trading partners’ uptake especially China which has eased its financial conditions to support its economy on the face of a slowing [global] economy,” he said over the telephone.

Yeah added that China’s growth could ensure sustained demand and that Malaysia’s output in electrical and electronic manufacturing remains robust based on sustained orders.