PETALING JAYA: Malaysia’s manufacturing sector could face an uphill task in the second half of the year (2H25) and much would depend on the outcome of the US reciprocal tariffs.
If the reciprocal tariff takes effect by next month, experts said this would impact the manufacturing sector and exports, which may pose a dampener on the country’s economy.
As of now, export-oriented industries are already feeling the heat of the 10% existing US import tariff.
The manufacturing sector, which is one of the core sectors of the economy, accounts for slightly more than one fifth of the country’s gross domestic product (GDP).
For the first quarter of financial year 2025 (1Q25), the sector accounted for 23% of the GDP, compared with 23.1% in 2024.
On April 2, the US government launched baseline tariffs of 10% on all imports to the country and reciprocal tariffs on trade partners on April 9. Malaysia was levied with a 24% reciprocal tariff.
The United States later announced it would impose a 10% tariff for 90 days on more than 75 countries that were willing to negotiate with the country.
Negotiations during the tariff pause would decide whether tariffs on Malaysia would be lifted, maintained at 24% or reduced.
Malaysia’s Industrial Production Index (IPI) grew 2.7% in April 2025 compared to 3.2% growth in the same month a year ago, according to the Statistics Department, falling short of expectations.
According to a Reuters poll of economists, factory output had been expected to rise 3.9%.
The Statistics Department said the IPI growth in April 2025 was mainly supported by a 5.6% rise in the manufacturing sector, while output in the mining and electricity sectors fell by 6.3% and 1.6%, respectively.
The government is forecasting a GDP growth of 4.5% to 5.5% this year, but this could be lower, economists said, due to the US trade policies and geopolitical risks.
For 1Q25, GDP grew 4.4% after expanding 5% in 4Q24.
The full-year GDP growth in 2024 was 5.1%.
IPI is a key economic indicator that measures the real output of the mining, manufacturing, and electricity sectors.
OCBC Senior Asean economist Lavanya Venkateswaran
OCBC Senior Asean economist Lavanya Venkateswaran told StarBiz there are some headwinds that could impact the manufacturing sector, namely the US reciprocal tariffs on imports from Malaysia and sector-specific semiconductor tariffs.
The latter is important given that the bulk of Malaysia’s exports to the United States are in the electronics and electrical sector, she said.
From January to April 2025, the manufacturing sector industrial production growth averaged 4.5% year-on-year (y-o-y), which was higher than 4.2% in 2024.
However, mining growth, and electricity have been a drag on overall industrial production, she said, adding that this likely reflects some frontloading in production and export trends ahead of the implementation of tariffs.
As to the impact of the manufacturing sector on the local economy, Lavanya said: “Domestic demand conditions were resilient in 1Q25 and there are limited signs that it is falling off a cliff in 2Q25.
“Passenger vehicle sales and tourist arrivals for example, remained strong, while export growth (supported by frontloading to the United States) was sustained.
“However, heading into the 2H25, the tide could turn if tariffs are imposed on Malaysia’s exports to the United States.
“As an open economy, the investment and household consumption cycles are exposed to fluctuations in exports.
“A sharp downturn in exports in the 2H25 will likely weigh on investment spending as businesses remain on the sidelines, while households increase precautionary savings.”
She expects manufacturing sector growth would slow to 3.8% y-o-y in 2025 compared to 4.2% in 2024 as growth slows sharply in the 2H25 if reciprocal tariffs are implemented.
“There is further downside risk to our forecast if tariffs are implemented on the semiconductor exports from Malaysia to the United States,” Lavanya said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid agrees that the 2H25 outlook for the manufacturing sector would be challenging.
He said the World Bank has revised its 2025 global growth forecast lower from 2.7% which was made in January to 2.3%, mainly on account of substantial rise in trade barriers and uncertainties over global policy environment.
Similarly, he said the GDP growth forecast for Malaysia was lowered from 4.5% to 3.9% for 2025.
“More importantly is the rate of implementation of the approved investments.
“Between 2021 and 2024, a total of 3,494 manufacturing projects have been approved.
“Of this amount, 87% of the projects have progressed into various stages of implementation, including full-scale production, factory construction, and machinery installation,” he noted.
He said 10.2% of the total projects are in the planning stage.
Mohd Afzanizam, however, said weak sentiments among businesses could potentially affect this momentum in view of the ongoing tariff negotiations with Donald Trump’s government. The outcome would be closely monitored by the investing and business community, he said.
As for the manufacturing GDP, he is forecasting the sector would moderate around 3.9% in 2025 from 4.2% in 2024.
“To cushion this impact, he said an overnight policy rate cut would to some extent help to reduce the cost of borrowings among the manufacturers.
“At the same time, the bilateral and multilateral trade agreements would be the critical platform for the sector to transition to a new market.
“From the fiscal policy point of view, perhaps targeted and time bound tax incentives would help to reduce the tax burden momentarily.
“The introduction of tiered energy pricing for high-efficiency manufacturers and enhanced industrial park infrastructure, for example smart grid, 5G and logistics hubs would also help to reduce their operating cost,” he said.
To lower the risks to Malaysia’s manufacturing sector, Lavanya said the relevant authorities have been focused on medium-term reforms, and this would enhance economic resilience during crisis periods.
These include a continued focus on fiscal consolidation, raising value add in key sectors such as semiconductors and diversifying spatial economic growth through initiatives such as the Johor-Singapore Special Economic Zone, she said.
Centre for Market Education CEO Carmelo Ferlito said it is normal to expect a slow down of manufacturing as external demand from the Malaysian export market to the United States may gradually soften as a result of the trade tensions.
“Manufacturing relies on a series of surrounding services and a deceleration of manufacturing will have consequences on the economy.
I want to stress, however, that the IPI shows that the real output remains in positive growth territory,” he said.
Ferlito said some of the measures to lower manufacturing sector risks include the need to further speed up commercial agreements with different countries, and cutting down on both tariff and non-tariff barriers.
At the same time, he said it is also the right moment to cut red tapes and rationalise incentive schemes.
