KUALA LUMPUR (Jan 3): Malaysia's manufacturing sector continued to face challenging business conditions in the final month of 2022.

S&P Global in its Malaysia Manufacturing PMI note on Tuesday (Jan 3) said that muted customer demand reportedly contributed to sustained moderations in output and order books.

It said companies subsequently trimmed input buying and downwardly adjusted inventory levels.

Backlogs of work, meanwhile, depleted at a rate among the fastest on record.

Some more positive developments within the latest survey data came from cost and supply pressures both easing.

Vendor performance stabilised in December, ending the three-year sequence of deterioration, and firms cut their selling prices for the first time since May 2020.

The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index posted at 47.8 in December, slipping from 47.9 in November to mark a fourth consecutive softening of operating conditions across the Malaysian manufacturing sector.

The latest moderation, though broadly in line with that seen in November, was the strongest since August 2021.

Averaging 48.1 over the final quarter of the year, the PMI is representative of approximately 5% year-on-year growth of GDP in Malaysia, thereby representing some loss of momentum from the situation in the third quarter.

Similar to each of the three months prior, a running theme within the latest survey data was fragile customer demand.

New orders and foreign demand both moderated in December, stretching the current sequences of reduction to four and six months, respectively.

Reflecting the softer inflows of new work, Malaysian manufacturing firms scaled back production volumes in the final month of the year.

The rate of moderation was slightly steeper than in November and the joint-sharpest since March.

Companies subsequently trimmed back purchasing activity in December and at a solid pace overall.

Lower purchasing and efforts to limit stock holdings amid the current lull in demand fed through to a reduction in pre-production inventories.

This was also the case for post-production inventories where firms reportedly favoured the use of existing stock when fulfilling new orders.

Concurrently, employment softened for the second time in the past three months.

Survey respondents primarily attributed lower staffing levels to voluntary resignations.

Despite the scaling back in output, there was evidence of spare capacity within the Malaysian manufacturing sector.

Firms continued to clear backlogs of work, thereby extending the current sequence of moderation to seven months.

Notably, the rate of reduction was among the sharpest on record and the joint-fastest since July 2017.

Anecdotal evidence suggested that the latest moderation stemmed from the reduction in order book volumes.

Manufacturers were confident of a rise in production over the coming 12 months, with some firms hopeful that market conditions would improve in the new year.

That said, concerns over the potential for demand conditions to remain muted in 2023 meant that business sentiment remained relatively subdued in December, posting below the historical average.

S&P Global Market Intelligence's Laura Denman said with muted customer demand remaining a key theme within December's PMI data, the Malaysian manufacturing sector registered a further loss in momentum in the final month of 2022.

She said the moderation in order book volumes, though slightly softer than in November, remained stronger than the average for the year as a whole which subsequently led firms to scale back production at a solid pace.

“Forward looking indicators suggested that firms were anticipating conditions to remain challenging in the coming months as signalled by a further trimming in input buying, reductions in inventory levels and a relatively weak outlook on output over the next year.

"However, with demand subdued, supplier performance has been able to recover somewhat with December data marking no-change in delivery time from the month prior - following a three-year sequence where delivery times have lengthened on a monthly basis.

“Latest survey data was also indicative of an easing in cost pressures.

“Input costs rose at the slowest pace in the current 31-month sequence of inflation and prices charged by Malaysian manufacturing firms fell for the first time since May 2020,” she said.