Manufacturing sector predicted to strengthen - MIDA | Malaysian Investment Development Authority
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Manufacturing sector predicted to strengthen

Manufacturing sector predicted to strengthen

05 Mar 2024

The nation’s manufacturing sector, which is one of the key economic sectors, is expected to strengthen in the coming months owing to improvement in the export-oriented sector.

Economists are anticipating the country’s external trade to improve and exports to further improve in the near term, partly attributing to the improvement in China’s economy and in anticipation of the technology upcycle.

Malaysia’s exports grew 8.7% year-on-year (y-o-y) in January to RM122.4bil, higher than the 3% projected by 17 economists in a recent Reuters poll.

The latest export figure also reversed Malaysia’s exports downtrend, which started in March last year.

On the whole, total trade increased 13.3% to RM234.7bil in January. Trade surplus was at RM10.1bil, but this was lower than the RM18.1bil in the same month a year earlier.

Kenanga Research said it is reiterating its outlook that domestic manufacturing conditions, especially in the export-oriented sector, will continue recovering in the coming months.

This is largely driven by the expectation of a technology upcycle, which is likely to appear more imminent in the second half of this year, the research house added.

Additionally, the brokerage said China’s gradual economic recovery is expected to pick up pace, given the significant amount of stimulus from the government.

“Nevertheless, the downside risk to our outlook remains associated with external factors such as escalating geopolitical tensions in the Middle East and Eastern Europe which could disrupt the global supply chain and potentially drag global trade activity into a prolonged downturn.

“Against this backdrop, we maintain our 2024 gross domestic product (GDP) forecast of 4.5% to 5%, compared with 3.7% last year,” Kenanga Research noted.

Malaysia’s manufacturing sector continued its recovery path, with the seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) rising to 49.5 in February, up from 49 in January.

The February figure was the highest since September 2022.

Output declined at the slowest pace since August 2022 with signs of recovery in both new orders and exports orders. The index has remained in contraction (below the neutral threshold of 50) since August 2022 due to subdued global trade.

Manufacturing PMI is a measure of the prevailing direction of economic trends in manufacturing. A reading above 50 signals expansion while below 50 indicates contraction.

TA Research said, traditionally, it draws correlations between PMI figures and official statistics such as real manufacturing sector data, real GDP and real exports.

“Notably, there exists a significant correlation of 62.2%, 60.4%, and 44.2%, respectively.

“Upon a more detailed analysis of the ongoing trend, there is a sense of optimism for a potential improvement in the first quarter (1Q), even if it remains below the growth threshold.

“This aligns with our maintained perspective, anticipating a positive momentum in the manufacturing segment’s contribution to real GDP, in contrast to the 0.3% contraction observed in 1Q23 (1Q24 real manufacturing forecast: 2% y-o-y).”

Moreover, the research house said as per insights from S&P Global, the historical relationship between PMI and official data indicates an upward trend in both GDP and manufacturing production, pointing towards improvement in 1Q24.

Looking ahead, the brokerage said optimism for the year-ahead outlook in terms of output slightly decreased to a six-month low in February, but confidence remains buoyed by the expectation of an improved demand environment and stabilised price conditions.

Source: The Star