Malaysia's PMI Remains Contracted Amid Weak Demand And Tariff Concerns
Malaysia's Manufacturing Purchasing Managers' Index (PMI) saw a marginal increase to 48.8 in May, up from 48.6 in April, according to the latest data. However, the index remained below the neutral 50.0 mark for the twelfth consecutive month since June 2024, signaling a continued, albeit mild, deterioration in manufacturing conditions midway through the second quarter of 2025.
Despite the prolonged contraction, economists anticipate that Malaysia's Manufacturing GDP growth in 2Q25 is likely to remain relatively stable, mirroring the performance of the previous quarters (1Q25: 4.1%; 4Q24: 4.2%).
Weak Demand Persists, Weighing on Key Indicators:
The latest PMI reading highlights the persistent challenge of weak demand. Total new orders continued their downward trend for the third straight month, although the pace of decline has eased. Notably, new export orders also contracted for the sixth consecutive month, indicating sluggish external demand.
Finished goods inventories continued to decline, suggesting manufacturers are adjusting to lower order volumes. While the rate of inventory reduction has slowed, overall stock levels remain lower.
Rising Input Costs Amid Stable Output Prices:
Manufacturers faced increased pressure from rising input costs in May. Input prices saw their most significant jump since November 2024, primarily attributed to unfavorable exchange rates and the impact of new tariffs, which have increased the cost of imported raw materials.
Interestingly, despite the higher input costs, output charges remained unchanged in May, ending a four-month period of price declines. This suggests that manufacturers are absorbing some of the cost increases rather than passing them on to consumers.
Business Optimism Dips Amid Global Uncertainties:
Business sentiment within the manufacturing sector has taken a hit, falling to its lowest level since June 2021. While firms expressed relative optimism for better demand conditions in the coming year, the prevailing concerns surrounding US trade tensions and ongoing labor shortages have dampened overall confidence.
Employment levels remained steady in May, halting a seven-month streak of job cuts. Companies continued to work through outstanding orders, with backlogs declining slightly.
Outlook: Domestic Demand to Provide Cushion Amid Tariff Uncertainty:
MIDF Research has revised its 2025 GDP growth forecast for Malaysia downwards to 4.3% (from 4.8%), following a weaker-than-expected performance in 1Q25 (4.4%). The downgrade also factors in anticipated headwinds in the second half of the year stemming from global trade uncertainty linked to potential US tariffs. While the possibility of a favorable Malaysia-US trade deal exists, a return to pre-2024 tariff levels is deemed unlikely.
Despite these external challenges, MIDF believes that Malaysia could still benefit from trade and investment diversion resulting from the ongoing US-China decoupling, leveraging its strategic location and diversified export portfolio. Domestically, the services and construction sectors are expected to be key drivers of growth, providing a buffer against external pressures Related
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