PETALING JAYA: Economists are positive on the country’s manufacturing activities as the year ends, but some are taking a cautious stance towards this trend moving into the first half of next year due to looming headwinds.
The electrical and electronics (E&E) sub-sector, including semiconductors, is expected to lead the way for stronger manufacturing growth, further underpinned by the deployment of artificial intelligence (AI), favourable investments and construction activities from various projects.
OCBC senior Asean economist Lavanya Venkateswaran told StarBiz she expects manufacturing activities, particularly associated with the E&E appliances sector, would remain solid for the remainder of 2025 and into early 2026.
“We expect continued resilience in E&E production moving into next year, albeit moderating from 2025, supported by AI-related applications and data centre infrastructure.
“However, the question remains whether growth momentum in this sector can sustain through 2026,” Lavanya said.
OCBC Senior Asean economist Lavanya VenkateswaranShe expects a moderation in economic growth momentum moving into 2026 based on the view that external demand would slow, albeit remaining uneven.
“We expect domestic demand conditions to remain resilient supporting domestic-oriented industrial production, but slower compared to 2025 reflecting a normalisation of growth in sectors such as construction,” Lavanya noted.
Malaysia’s economy is projected to grow between 4% and 4.5% next year, from 4% to 4.8% this year.
For the third quarter of 2025 (3Q25), growth, as measured by real gross domestic product (GDP), expanded by 5.2%, while the economy grew by an average of 4.7% in the first nine months of 2025.
The seasonally adjusted S&P Global Malaysia manufacturing purchasing managers’ index (PMI) rose from 49.5 point in October to 50.1 in November, indicating a slight improvement in sector conditions and marking the first uptick since May 2024.
The manufacturing PMI gauges the prevailing economic trends in the sector. A reading above 50 signals expansion, while a reading below 50 indicates contraction.
It is an economic indicator based on a monthly survey of purchasing managers in the manufacturing and services sectors, and provides an early signal of what is happening in the economy before official data is released
On the industrial output side, Malaysia’s industrial production index (IPI) expanded 5.7% year-on-year (y-o-y) in September compared to the previous month’s 4.8% following a 5% increase in manufacturing, with mining surging 10.2% and electricity increasing 2.8%. Manufacturing contributed two-thirds to the IPI weightage.
MARC Ratings Bhd chief economist Ray Choy said the latest PMI reading of 50.1 is an encouraging sign for the sector.
He said it points to a firmer underlying sentiment, supported by lower tariffs, improved policy clarity, and more accommodative financing conditions as the year draws to a close.
These factors have enabled firms to continue and, in some cases, accelerate their purchasing and expansion plans, providing support heading into 2026.
“Investment trends are also favourable, with approved investments reaching RM93.8bil year-to-date to September, a 5.6% y-o-y increase, which is at the high end of its historical growth range.
“Furthermore, in October 2025, exports surged 15.7% (y-o-y) to a record high of RM148.3bil, driven by semiconductors, electronics and commodity-related products.
“Taken together, these developments suggest that manufacturing activity is likely to maintain its momentum through the remainder of 2025 and into the first half of 2026,” Choy noted.
He is projecting GDP to be at 4.5% for 2025 and 4.3% for 2026, and said manufacturing should remain resilient heading into 2026, with the E&E sub-sector leading the recovery.
“The push towards AI deployment will continue to drive demand for related components, and this trend has already seen E&E outpacing overall GDP growth through 2025.
“Construction will also sustain a strong pace next year, supported by major projects such as the Johor-Singapore Special Economic Zone, Penang’s LRT Mutiara Line and ongoing data infrastructure projects.
“This will, in turn, bolster demand for building materials and related manufacturing sub-sectors. Taken together, these factors point to continued economic momentum through to 2026,” he said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the trade deals with the United States via the Agreement on Reciprocal Trade or ART has, to some degree, alleviated concerns over how Malaysia’s trade with the United States can be conducted.
He said key products such as semiconductor and pharmaceutical with other 1,711 products would still be exempted from tariffs, but others such as furniture would be levied a 19% tariff hike.
At the same time, he said Malaysia continues to trade with other nations which would boost the country’s trade flows.
On that note, Mohd Afzanizam said the slight uptick in PMI to above 50-point demarcation line appears to have injected a glimmer of hope that Malaysia should be able to withstand the US trade protectionist policies.
“What matters now is how the small and medium enterprises (SMEs) will be able to leverage the bilateral and multilateral trades agreement in order to gain better access to the overseas market.
“We are projecting GDP growth of 4.7% in 2025, and foresee the growth momentum would moderate to around 4.3% as next year, as global economies will face the full brunt of the US tariffs,” he said.
Mohd Afzanizam is hopeful semiconductors would still continue to record respectable growth next year in view of more spending on AI related infrastructure globally.
Other sectors within the manufacturing industries such as food and beverage, machinery and equipment, chemicals and rubber gloves, among others, would continue to propel the sector’s growth, he added.
On the potential headwinds that would affect the local manufacturing activities, he said this would be externally related, namely how the US economy would fare next year.
“Should the US slowdown further decelerates, then we can expect the ripple effect across the globe.
“The other is the geopolitical risks and its ramification on global supply chains. In a nutshell, global central banks have been reducing interest rates and that says a lot about the global growth prospect in the next one to two years,” Mohd Afzanizam said.
OCBC’s Lavanya said the main unknown remains the US tariffs for the semiconductor sector, which are still under investigation.
“The conclusion of these investigations and the final decision on semiconductor tariffs will provide further clarity to the manufacturing and growth outlooks.
“Some other potential headwinds include a sharper-than-expected global economic growth slowdown and a resumption of trade tensions,” she said.
