Manufacturing inching to stability

The Star

2 days ago

KUALA LUMPUR: The outlook for Malaysia's manufacturing sector, which showed signs of stabilisation in production activity in June, will depend on several factors – one key element being the potential impact of tariff-related developments.
According to S&P Global, Malaysia's manufacturing purchasing managers' index (PMI) rose to 49.3 in June, up from 48.8 in May, marking the highest reading since February.
While still below the neutral 50.0 mark that separates expansion from contraction, the latest data signals that business conditions are inching closer to stabilisation.
This improvement was underpinned by a softer pace of decline in both output and new orders.
External demand also showed tentative signs of recovery, with new export orders moderating at a slower rate, hence contributing to the overall stabilisation in manufacturing activity.
At the Asean level, the manufacturing sector ended the first half of 2025 (1H25) on a weak note, with the PMI falling to 48.6 in June. Analysts noted that this was 'the most pronounced worsening in operating conditions since August 2021.'
Notably, the region's headline PMI slipped to a 46-month low as output continued to contract across the region, accompanied by sharper declines in new orders, purchasing activity, and employment.
Among Asean countries, TA Research said Vietnam recorded the steepest drop in new export orders in over two years.
Myanmar's manufacturing sector remained in decline, while Indonesia saw a marked deterioration in operating conditions by mid-2025.
Given these mixed regional dynamics and the still-cautious recovery seen in Malaysia, Socio-Economic Research Centre executive director Lee Heng Guie said the local manufacturing sector's trajectory in the coming months will depend on both domestic and external factors.
He said Malaysia's June PMI reading, although still below the growth threshold, mirrors global trends and uncertainty, particularly around tariffs.
'With the June number, even though it's still under 50, I think it's quite in tandem with what we're seeing globally – where uncertainty about tariffs remains unresolved,' he told StarBiz.
He said this uncertainty may have contributed to Malaysia's weaker trade performance, citing the recent 1.1% year-on-year (y-o-y) decline in exports in May, a contraction that came against market expectations for growth.
This, he said, suggests that businesses had previously frontloaded their shipments in anticipation of potential tariff hikes.
'Now, that frontloading appears to be tapering as companies are likely holding back and waiting for the outcome of the 90-day tariff review, which concludes on July 9, before making further decisions.'
In the latest development, US President Donald Trump had ratcheted up trade tensions, stating he won't delay the July 9 deadline for imposing higher levies on trading partners.
'What we hope to see in the 2H25 is some clarity. Once we have the numbers after July 9, then businesses, buyers and producers, can plan accordingly, assuming there are no further changes,' Lee said.
'But we still don't know if it will stop there. If it does, at least there's clarity,' he added, referring to the potential for further tariff actions beyond July 9.
Turning to the domestic front, Lee said manufacturers are also bracing for rising input costs with several policy changes and cost adjustments set to take effect in July, compounding the pressures already felt from external uncertainties.
From July 1, manufacturers are contending with additional cost pressures stemming from the implementation of the expanded sales and service tax (SST), which now covers a broader range of goods and services.
At the same time, a new electricity tariff structure has come into effect, introducing tiered components for energy, capacity and network charges.
'For manufacturers, the single-tier sales tax means they pay it upfront, and eventually the cost passes down to wholesalers, retailers, and consumers,' he explained.
Although many essential consumer goods remain exempt under the SST, he said manufacturers are grappling with other rising costs, which could further squeeze operating margins.
'Manufacturers have to decide whether to absorb these costs or pass them on. If they want to retain their market share, they may absorb part of it.
'But they can't fully absorb everything ... so either margins get squeezed, or they risk losing customers,' Lee added.
As a result, the net effect could be a slowdown in production, especially if consumers respond by cutting back on spending, he added.
However, Lee does not expect a deep contraction unless there's a prolonged shock.
'To see an actual decline in production, you'd need many months of negative data or a recession, which we don't see happening right now. But yes, the operating environment is becoming more challenging.'
Meanwhile, MIDF Research said the latest PMI reading indicates that the country's modest gross domestic product (GDP) growth recorded in the first quarter of 2025 (1Q25) likely continued into the 2Q25.
'In an earlier data release, industrial production (IPI) growth slowed to 2.7% y-o-y in April (down from 3.2% in March).
'We expect further moderation in May 2025, largely due to weaker export performance during the month, which is likely to dampen output growth,' it added.