THE Federation of Malaysian Manufacturers (FMM) is unperturbed over a plunge in the country’s manufacturing index, saying that economic indicators have so far been encouraging.

On Wednesday, reports said the Nikkei Malaysia manufacturing purchasing managers’ index, or PMI, plunged to 46.8 in December from 48.2 in November, recording the sharpest drop in the survey’s 6½-year history.

Readings above 50 indicate an expansion while those below 50 indicate a contraction.

The survey, compiled by IHS Markit, cited contributing factors, such as reductions in production and new orders and clearing of inventories.  

However, FMM president Soh Thian Lai said the drop could be attributed to the holiday season, adding that data from other indicators have given a more positive view of the state of the economy.

FMM, the country’s largest economic organisation, represents more than 3,000 manufacturing and industrial service companies.  

Malaysia’s Department of Statistics report for October 2018 showed that the industrial production index for manufacturing increased in both September and October at 4.8% and 5.4% respectively, Soh said.

Manufacturing sales value for September and October also grew by 8.2% and 10.2% respectively with strong improvements across all sectors.

“Very preliminary readings from the ongoing 2H2018 FMM-MIER Business Conditions Survey point towards generally stable business conditions,” Soh told The Malaysian Insight.

The federation valued “the heads-up by international indices”, such as the Nikkei Malaysia Manufacturing PMI, but said the results were no cause for concern.

“FMM notes from past years that December has always been a soft month due to the holiday season and most orders, especially exports, would have been fulfilled earlier to be in time for Christmas sales.”

Still, he said, FMM members would continue to “increase vigilance in monitoring market developments and to further refine market strategies and efforts accordingly to minimise risks and seek out opportunities”.

The record-low PMI was released a day after Finance Minister Lim Guan Eng said Malaysia needs some three years before it can return to fiscal health, even as economic indicators, such as the resurgent growth in exports in October 2018, prove that the country is in good economic health.

While economic indicators on the ground are still strong, Soh concedes that there is a possibility that Malaysian production and business sentiments could be hit by the ongoing US-China trade war.

Almost 50% of Malaysian exports are incorporated into China’s final products exported to the US and 12% of total exports could be directly impacted by US tariffs on Chinese goods.

The bulk of affected products are mainly electrical and electronics products, petroleum, metal ores and mining goods, chemicals, plastics and rubber products, Soh said.

“According to the ministry’s analysis, Malaysia’s exports will likely decline by 0.08 and GDP by 0.02 percentage points over 2018 to 2020.

“If the US-China trade war escalates further, causing global output to decline 0.4 percentage points, Malaysia’s GDP could also decline up to 0.7 percentage points.” – January 4, 2019.