Manufacturing downturn moderates in August

Manufacturing downturn moderates in August
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KUALA LUMPUR (Sept 1): The Malaysian manufacturing sector reported a further lack of momentum during August, albeit with the downturn moderating compared to July.

IHS Markit said businesses reported sustained reductions in both production levels and new orders as the latest rise in COVID-19 cases hampered output and sales across the sector, though both declined at the softest rates for three months.

Moreover, the lack of demand pushed manufacturers to scale down workforces in August.

That said, businesses were increasingly optimistic regarding the year-ahead outlook, with hopes that the end of the pandemic would drive a broad recovery in supply chains and demand.

The headline IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI) — a composite single-figure indicator of manufacturing performance — rose from 40.1 in July to 43.4 in August, indicating a sharp deterioration in the health of the sector, but one that was softer than those recorded over the prior two months.

IHS Markit said looking at the historical relationship between the PMI and official statistics, the latest reading is representative of a moderation in manufacturing production and broadly stagnant GDP, as the survey pointed to the ongoing impact of the COVID-19 pandemic on the economy.

It said August data suggested that output fell among the surveyed companies for the fourth month in a row.

The pace of the reduction remained marked but was the softest since May.

Firms commonly attributed the decline to a lack of demand and shortages of inputs causing companies to reduce production.

IHS Markit said new order volumes also fell, though the pace of the decrease was the softest in the current three-month sequence.

It said manufacturers noted weaker client confidence and projects placed on hold as infection rates surged.

Furthermore, new export sales also failed to gather momentum, as COVID-19 cases also rose in key external markets, dampening demand.

It said that at the same time, there was a renewed fall in employment at Malaysian manufacturing firms in August.

Although only marginal, the August decline means staffing levels have now fallen in four of the last five months, with producers often noting a lack of foreign work permits being issued due to COVID-19 restrictions.

Firms also highlighted a renewed increase in backlogs of work as lower production capacity and difficulty in sourcing inputs placed additional strain on manufacturers.

Input costs increased for the fifteenth consecutive month in August, reflecting higher prices for raw materials and logistics.

The rate of input price inflation eased to a nine-month low yet remained steep overall.

Manufacturers partially passed these higher costs to clients through higher output charges, which rose at a modest pace and extended the current sequence of inflation 15 months.

IHS Markit said looking ahead, Malaysian manufacturers were increasingly optimistic regarding the year-ahead outlook for output.

Expectations reached the highest since April, underpinned by hopes that the pandemic would recede, inducing a broad-based economic recovery and an improvement in the health of global supply chains.

IHS Markit chief business economist Chris Williamson said an easing of some COVID-19 lockdown measures helped take some of the pressures off Malaysian manufacturing in August.

He said IHS Markit’s COVID-19 containment index showed the lowest levels of restrictions since April, facilitating a rise in the headline PMI to its highest since May.

“Conditions remain tough for producers, however, with order books continuing to decline, supply chain delays widely reported and raw material prices rising sharply again.

“Encouragingly, business expectations for the coming year improved during the month, as more companies grew optimistic that the worst of the pandemic has passed.

“Concerns over the spread of the Delta variant nevertheless meant the outlook remains more uncertain than earlier in the year, keeping a lid on the overall degree of optimism,” he said.

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