Steady Expansion In Manufacturing Activity In July Backed By E&E

Manufacturing activity improved for the second month, driven by an improvement in the production level amid increased orders, with output volumes returning to growth for the first time in seven months. Nonetheless, elevated raw material prices and supply constraints persisted, which weighed the recovery, consistent with the view that the manufacturing sector is still surrounded by downside risks that could hinder its growth potential.

With a renewed rise in production levels in July, the first since December 2021 − the sector saw new orders increase for the fourth straight month with the fastest pace since April, driven by improved client confidence. However, new export orders fell for the first time since March at the quickest pace for ten months, weighed by global supply chain issues and subdued external demand.

Cost pressure persisted amid higher raw materials and freight costs − Shortages of raw materials and higher logistic costs contributed to higher input prices. Concurrently, output costs increased with firms continuing to pass higher costs onto clients. Nonetheless, the overall inflation rate eased to the lowest in ten months.

The good news is firms remained optimistic, with the degree of optimism rising to the highest since February, sentiment improved amid hopes of a stronger recovery in demand once price and supply pressures ease. Meanwhile, the employment levels were scaled back for six straight months but with a slight job cut.

Weak manufacturing expansion among major economies
US (52.3; Jun: 52.7): manufacturing expansion slowed in July, its lowest level in two years, amid unchanged production levels and subdued new orders. Japan (52.1; Jun: 52.7): manufacturing activity slowed to a 10-month low in July due to a broad decline in new orders and production.

Manufacturing activity to remain on a steady expansion despite heightened downside risks, Kenanga maintained that domestic manufacturing activity would remain on a recovery path given the positive external trade performance and a gradual pick-up in domestic economic activities. However, we still expect manufacturing growth to moderate (2022F: 5.7% versus 2021: 9.5%) due to the elevated external pressures associated with China’s zero-Covid policy and the Russia-Ukraine crisis.

However, the adverse effect is expected to be minimal due to Malaysia’s export diversification, backed strongly by the E&E sector, relatively high commodity prices, and robust external demand from key trading partners. Against this backdrop, the research firm maintains its 2Q22 GDP growth forecast at 7.7% (1Q22: 5.0%) with full-year growth is expected to settle at 5.0% – 5.5% (2021: 3.1%).

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