PETALING JAYA: After a soft start to the year, analysts are still banking on a gradual recovery of industrial production in the coming months.
However, with the trade war evolving, downside risks are rising and this could limit domestic industrial activities’ growth potential for 2025.
Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid told StarBiz that the Industrial Production Index (IPI) growth could hover around 2% to 2.5% year-on-year (y-o-y) in February and March.
In January, due to a broad-based slowdown, the country’s industrial production growth hit a 19-month low at 2.1%.
This was lower than December 2024’s 4.6% y-o-y increase and below the consensus forecast of 2.7% y-o-y.
The IPI grew at a slower-than-expected pace in January as factory activity decelerated, while mining and electricity output contracted.
Mohd Afzanizam said that February would normally be a slow month for IPI, from a seasonal point of view.
“But beyond the seasonality factor, the main concern is how the trade war could potentially disrupt international trade flows.
“It would seem the Trump administration is adamant to use import tariffs as a means to shore up local production.
“However, the ones that pay the tariff are the local businesses and there is a chance that these businesses might pass on the additional cost to the end-consumer.
“Having said that, the electrical and electronics (E&E) sector, which accounted for 18.2% of the total IPI, could provide the needed support owing to the proliferation of artificial intelligence-related software and devices.”
The latest World Semiconductor Trade Statistics forecast showed that global semiconductor sales would grow by 11.2% in 2025, albeit slower than 19% in 2024.
“This will be primarily driven by integrated circuits, which could grow by 12.3%, although much slower than the 24.8% of last year.
“Nonetheless, it is a healthy trend for semiconductors.
“The key concern moving forward will be on the trade war and its impact on global growth. It would appear that downside risk to growth is tilted to the downside,” he added.
In a note, CIMB Research said the “early festive distortion” – referring to the earlier timing of the Chinese New Year holidays – in January’s IPI is expected to normalise in February.
This would support its annual IPI growth estimate of 3.8% for 2025, according to the research house.
At 3.8%, the growth would be similar to 2024.
“Despite elevated trade risks from tariffs, which may heighten global inflationary pressures and dampen growth prospects, we maintain our 2025 gross domestic product (GDP) growth forecast at 5%.
“This is consistent with the government’s target of 4.5% to 5.5%, driven by resilient consumer spending and robust investment growth amid a healthy labour market and conducive investment landscape,” it said.
Commenting on January’s IPI, CIMB Research noted that while manufacturing activity slowed, silver linings emerged in the continued strong growth of E&E and food and beverage output.
Retail sales, amid early festive spending, accelerated to the quickest pace in eight months. However, this was offset by a sharp decline in vehicle sales.
Meanwhile, TA Research pointed out that the sluggish momentum in January’s IPI reflects weaker external demand and possible inventory adjustments within the manufacturing sector, alongside supply-side constraints in the mining and energy segments.
Moving forward, it said industrial activity will likely remain sensitive to global trade conditions, domestic demand trends and energy price fluctuations.
In January, the manufacturing component increased at a slower rate of 3.7% y-o-y and contracted by 0.2% month-on-month.
The growth in the sector in January was driven by the weaker performance of export-oriented industries.
The mining sector contracted by 3.1% y-o-y in January, reversing from the marginal 0.4% y-o-y growth recorded in December 2024.
The downturn was primarily driven by a sharp slowdown in natural gas production growth.
As for electricity generation, there was a marginal decline of 0.1% y-o-y in January, a stark contrast to the 3.5% y-o-y expansion in December.
The decline suggests a slowdown in business activity and industrial operations, as electricity demand typically correlates with economic activity across the manufacturing, commercial and residential sectors.
Nevertheless, TA Research believes that the domestic manufacturing production has continued expanding into 2025, albeit at a measured pace.
This is based on the Purchasing Managers’ Index, which has averaged 49.2 in the first two months of 2025, indicating a gradual stabilisation in the sector.
A further improvement in March 2025 would bolster key economic indicators such as the IPI, reinforcing broader economic resilience, stated TA Research.
“However, the persistent contraction in the mining sub-index of the IPI remains a downside risk, as prolonged weakness in resource extraction could weigh on overall industrial output.
“We expect IPI growth to exceed 3% in the first quarter, aligning with our full-year forecast of 3.5%,” it said.
Kenanga Research also expects the manufacturing activities to expand this year, or 4.7% to be exact.
It will be supported by the low base effect from the early part of 2024, an ongoing tech upcycle and resilient domestic demand, aided by a steady labour market and record-high government spending under Budget 2025.
The realisation of the record high approved investment recorded last year may also boost manufacturing output by increasing production capacity.
“Nevertheless, our outlook remains susceptible to downside risks, mainly associated with the impact of an escalating global trade war due to shifts in the US trade policy.
“However, we still believe the impact would be minimal as Malaysia could benefit from trade and investment diversion, given its favourable trade and investment policies.
“A weaker-than-expected recovery in China’s economy may also dampen our trajectory,” it said.
In a separate note, Hong Leong Investment Bank Research pointed out that it continues to expect domestic spending and the strong investment pipeline to help mitigate the potential effects of slower external demand amid a global trade war. “Following this, we maintain our 2025 GDP forecast at 4.9% y-o-y,” it said.
