KUALA LUMPUR (Nov 1): Malaysian manufacturers experienced a challenging business environment again at the start of the final quarter of 2023 as demand conditions continued to wane.

In a statement on Wednesday, S&P Global Market Intelligence said new orders moderated and production was scaled back.

It said employment also eased, but firms were still able to deplete backlogs of work to the greatest extent since the survey began in July 2012.

Meanwhile, currency weakness and higher raw material prices added to firms' input costs, but the rate of inflation was relatively muted.

Likewise, selling prices increased only slightly during the month.

The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) was unchanged at 46.8 in October and signalled an easing of business conditions for the fourteenth consecutive month.

The historical relationship between the PMI and official GDP data suggests that GDP is still set to improve modestly.

Looking at official data on manufacturing production, however, the PMI readings are indicative of a stagnation on a year-on-year basis.

S&P Global said the latest PMI survey pointed to a further moderation of manufacturing output, the fifteenth in as many months.

The pace at which production eased was marked and the fastest since January.

Respondents largely attributed the latest easing in production to weak demand conditions both domestically and internationally.

This anecdotal evidence was consistent with data covering total new orders and new export business, both of which saw a sustained slowdown in October.

With new orders softening, manufacturers were able to transfer spare resources to work on outstanding business.

Backlogs of work subsequently fell sharply over the month, and to the largest degree in the survey's history.

This record backlog depletion was registered in spite of a further scaling back of workforce numbers.

Employment was reduced for the sixth month running amid the reported loss of some permanent members of staff.

Although modest, the pace at which workforce numbers eased was the fastest since June 2022.

Lower new orders and output requirements also led firms to ease back on their input buying and run down inventories of both purchases and finished goods.

Weak demand for inputs meant a lack of pressure on capacity at suppliers. Lead times on the delivery of items continued to lengthen, however, amid material shortages.

The rate of input cost inflation strengthened gradually in October, reaching the highest since last November.

That said, the latest increase was still softer than the series average and much weaker than seen over much of the past three years.

According to respondents, inflation reflected both currency weakness and higher costs for raw materials in international markets.

Output charges rose for the third month running as firms passed higher input costs on to their customers, but the rate of inflation remained only slight.

Hopes that the demand environment will improve over the course of the next 12 months supported confidence in the outlook for production.

Optimism picked up to a six-month high, but was still softer than the series average. Around 19% of respondents predicted growth of output, while 8% were pessimistic.

S&P Global economics director Andrew Harker said the latest S&P Global Malaysia Manufacturing PMI suggests that firms continued to struggle against the backdrop of demand weakness, both at home and abroad.

He said the ongoing depletion of backlogs of work in order to support output reached its peak in October, with outstanding business cleared at an unprecedented pace.

“We will therefore need to see greater inflows of new work in the months ahead if manufacturers are to be able to maintain production schedules.

"There were further signs of a pick-up in cost inflation in October, but we are still not seeing prices increase at anything like the pace we did in the three years following the Covid-19 pandemic.

“In fact, with demand remaining muted, firms raised their own selling prices only slightly over the month,” said Harker.