This article first appeared in The Edge Malaysia Weekly, on December 14 - 20, 2015.
LAST Thursday, the Department of Statistics Malaysia released the Industrial Production Index (IPI) for October, which showed 4.2% growth. While the figure was down from 5.1% in September, it was higher than August’s 2.3%.
The steady IPI data, which measures total industrial output — manufacturing, mining and electricity — may be a surprise to those who track the Nikkei Malaysia Manufacturing Purchasing Manager’s Index (PMI), which paints a different picture among manufacturers.
That’s intriguing, given that data show that manufacturing output supported the overall growth in the IPI, aided by electricity output, which also expanded in October. Mining output (where oil and gas production is recorded) was the only component of the IPI that contracted in October, dragging the IPI growth reading down to 4.2% compared with 5.1% in September.
In short, while IPI data show there was a pickup in manufacturing output, the PMI — which measures only the manufacturing sector — has been showing further contractions over the last few months and, thus, warns of a further slowdown ahead.
It is worth noting that manufacturing industries make up about two-thirds of the IPI and the data show that the segment had support from the electrical and electronic (E&E) segment.
Citing a separate report, Kenanga Research says manufacturing sales for October were up by 6.5% year-on-year to RM58.6 billion, and the biggest increase was seen in E&E components and consumer electronics. The latter is likely be due to currency translation gains from a weaker ringgit, says the research house.
The PMI derives its index from indicators for new orders, output, employment, suppliers’ delivery times and stock of purchases. Any figure above 50 indicates overall improvement of the sector’s operating conditions while below 50 would mean persistent weak operating conditions.
Chris Williamson, chief economist at London-based research house Markit, says in an email to The Edge that the PMI survey is conducted among 350 manufacturing firms every month. He adds that the respondents have been carefully recruited to accurately represent the true structure of manufacturing.
Questions that are usually asked in the survey include how business conditions have changed compared with the previous month, with the comparison made using data on output, employment and prices, among others. He says the PMI readings track actual activity and not sentiment.
Since April, the PMI reading has come in below the 50-point threshold, and it contracted at a faster rate in its latest reading in November, to 47 points from 48.1 in October.
Markit highlights in its report that the overall contraction shows a decline in four out of five PMI components — production, new orders, employment and stocks of inputs — for November.
A number of companies said the challenging market conditions and a fall in sales were factors behind the contraction of the PMI. Declines in production were significant, while output was matched by the marked fall in new work intakes, says Markit.
“In fact, the rate of decline was the quickest in the series’ history to date. Data suggests that the main driver behind the fall in total new orders was poor domestic demand, as new exports increased during November,” adds the London-based research house.
The only consolation seems to be the expansion of new orders from abroad for the third consecutive month. While the rate of growth has eased from October, reports Markit, it was still in line with the long-term trend. In the survey, manufacturing companies said the weaker ringgit helped to improve international competitiveness.
Since the beginning of the year, the ringgit has shed about 22% against the US dollar. It is currently hovering around 4.20.
Many export-oriented companies, which transact in US dollars for their exports, have been obvious winners of a weaker ringgit.
Take furniture maker Evergreen Fibreboard Bhd (fundamental: 1; valuation: 0.30), for example. The company reported a foreign exchange gain of RM8 million for its third quarter ended Sept 30, 2015 (3QFY2015). A year ago, the same quarter yielded a gain of RM1.56 million. The company’s revenue for 3QFY2015, which increased by 9.2% to RM256.04 million from the previous year, was attributed to higher selling prices due to the strengthening of the US dollar.
Markit’s report adds that employment within the manufacturing sector contracted for the first time in three months, as firms strove to remain lean in a tougher operating environment.
In addition, Markit reported that selling prices rose at the fastest rate in the series’ history as companies tried to pass on their higher costs, thanks to the unfavourable exchange rate that resulted in higher costs of imported materials.
While many economists in Malaysia have yet to start tracking the PMI because it is a fairly new index here, it has already become a recognised indicator in many parts of the world. Perhaps, it has to do with its track record for anticipating changes in economic conditions in key economies.
In the case of Greece, the PMI has stayed below 50 since the country’s debt crisis exploded in 2009. Prior to that, PMI data had shown signs of stress by falling month after month.
Williamson, for one, reckons that the PMI should warrant more attention here, given the significance of the manufacturing sector to the Malaysian economy.
“Manufacturing accounts for around one third of Malaysian gross domestic product, so its performance will clearly have a huge impact on the economy. Similarly, the sector accounts for one in three jobs. Many service sectors, notably transport and accounting, as well as the energy sector, are dependent on the manufacturing sector, so the health of the goods-producing sector can have a wide impact across the economy. Moreover, manufacturing tends to be more cyclical than the economy as a whole, so it acts as a very useful bellwether.”
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