PETALING JAYA: As tensions mount in the Middle East following the attack on Iran, manufacturers are indicating a slowdown in their businesses, with firms cutting jobs in February at the joint-strongest pace since August 2020 amid weaker output and new orders.
Nonetheless, experts are of the view that the purchasing managers’ index (PMI) dip in February may be temporary, and maintain that the broader outlook for the electrical and electronics (E&E) sector, the country’s largest exports contributor, remains intact.
CP Global Fintech Solutions chief investment officer William Yii said seasonal distortions from Chinese New Year and logistics congestion partially cloud the February reading, and that he would not “draw a definitive conclusion from a single data point”.
Yii opined the March print will be far more telling as a continuous expansion is evidence needed for a sustainable manufacturing recovery.
“That said, the constructive case for a broad-based manufacturing recovery in Malaysia has become harder to argue with confidence as firms are discounting to stimulate demand, which is an anecdotal sign that a firm recovery has not arrived just yet,” he told StarBiz.
According to the latest S&P Global Malaysia Manufacturing PMI data, the country’s manufacturing sector registered a slowdown midway through the first quarter of 2026 (1Q26), a shift from the improvement recorded at the start of the year.
The seasonally adjusted PMI fell below the neutral 50 mark to 49.3 in February, down from a 20-month high of 50.2 in January, signalling a moderation in the sector’s health for the first time in four months.
The report noted that although slight, the pace of the slowdown was the most marked since June 2025.
Moreover, S&P Global data showed underpinning moderation within the sector were renewed slowdowns in new orders and output, while firms scaled back hiring at a joint-record pace, matching levels last seen in August 2020.
Operating expenses also rose modestly in February after input costs declined in January, while firms slightly marginally lowered their selling prices amid a challenging environment.
Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong said his reading of the February PMI is cautious, but not alarmed.
Yong added that a single month’s contraction does not constitute a structural reversal, and that this pattern has been observed before.
Even so, he noted the underlying sub-indices do deserve some scrutiny.
Apart from seasonal factors, Yong pointed out that new export orders rose for a second consecutive month, which indicates that external demand resilience remains intact and it is domestic order flow that has temporarily eased.
“Employment contracted sharply – among the most pronounced single-month drops since August 2020. Firms rarely shed headcount on the basis of one soft month, and this warrants close monitoring through 1Q26.
“On the other hand, backlogs ticked up and vendor lead times lengthened to their most pronounced delays in 15 months – likely indicators of capacity strain that tend to precede activity rebounds, not sustained contractions,” Yong said.
Importantly, the broader Asean manufacturing PMI held firmly in expansion at more than 50 points in February, suggesting Malaysia’s dip is idiosyncratic rather than symptomatic of regional deterioration, Fortress Capital’s Yong said.
“Therefore, February represents a pause, and may not represent a reversal. Should March and April confirm a sustained sub-50 trajectory, we would have to revise that view accordingly.
“As it stands, the data does not alter our sector-level view,” he said.
The development comes amid heightened global uncertainty, with tensions escalating in the Middle East following attacks on Iran and renewed volatility in US trade policy.
The US Supreme Court recently ruled that US President Donald Trump lacked authority to impose sweeping tariffs under the International Emergency Economic Powers Act, effectively striking down the measures.
Trump has since indicated he could pursue tariffs through other legal avenues, including Section 232 of the Trade Expansion Act, which are sector-specific tariffs.
The administration has already used Section 232 to impose duties of about 25% on semiconductor imports in January, covering specific high-end advanced computing chips critical for artificial intelligence (AI).
All this could pose downside risks to Malaysia’s manufacturing sector.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said while the US Supreme Court’s decision may have given a sense of relief to manufacturers, Trump’s adamant stance to enact tariffs using other routes will increase the cost of doing business in the United States.
“As such, the main concern would be demand from the United States could slow. In addition to that, the war in Iran has led to higher crude oil prices which could affect the energy cost for the businesses and households. In that sense, the downside risk from slower global growth has become elevated,” he said.
Brent crude oil has risen by nearly 20% to US$87.44 per barrel since the start of the US-Iran conflict.
Yii said the PMI introduces “meaningful execution risk” for the E&E sector in the near-term, despite the fact that the country continues to attract investment as a geopolitically neutral hub in the US-China tech rivalry.
He said the E&E sector’s recovery is deeply bifurcated where front-end strength is concentrated in AI data-centre chips and high-bandwidth memory; segments where Malaysia’s outsourced semiconductor assembly and test, as well as electronics manufacturing services ecosystem currently has limited direct exposure.
“On the other hand, legacy automotive, industrial, and consumer segments – the bulk of Malaysia’s manufacturing base – are still working through inventory digestion.
This is precisely where the capital expenditure (capex) cycle matters: investment commitments being made today in advanced packaging and fab capacity carry a 12 to 18 month lag before translating into production volumes and export revenues – the February PMI softness reflects exactly that gap.
“Net-net, the eventual realisation of capex commitments by global technology companies remains a big factor for further PMI expansion down the road,” Yii said.
Yong, however, noted that monthly PMI prints are inherently noisy and frequently lag the structural dynamics that drive earnings cycles for listed technology holdings.
The important nuance here, Yong said, is that recovery is not broad-based, as recent Bursa Malaysia December 2025 quarter results make clear.
“Our outlook for the local technology and E&E industries remains intact. The divergence remains stark — AI infrastructure and advanced packaging drive outperformance; legacy consumer electronics and radio-frequency segments continue to lag,” he said.
Regarding the impact from the Middle East conflict on the manufacturing sector, Yii said the most immediate channel is supply chain disruption, noting that pre-existing port congestion, longer shipping routes, and elevated freight costs are already visible in the current PMI data, with supplier delivery times stretching to their longest in 15 months.
“The geopolitical risk in the Middle East will add further friction to an already strained logistics environment,” he said.
The second aspect is energy cost pass-through. This is as the domestic manufacturing sector is energy-intensive and export-oriented, and a sustained oil price elevation raises input costs for producers that are already operating in a margin-compressed environment.
Notably, Yii said the February PMI had flagged rising input costs despite weak demand, which is a stagflationary signal that warrants attention.
“The countervailing dynamic, however, is that sustained geopolitical instability continues to accelerate supply chain diversification away from higher-risk geographies, which structurally benefits Malaysia’s positioning as a stable, investment-grade manufacturing destination — the conflict, paradoxically, reinforces the long-term investment case for the country.
“This, however, remains a broad thesis rather than a fact for now,” he said.
Meanwhile, Yong said in moderate scenarios (partial Strait of Hormuz constraints), the drag on manufacturing margins should be contained and likely manageable.
“In a protracted disruption however, stagflationary pressures could weigh more heavily on global growth and export demand, therefore, impacting Malaysia indirectly through the secondary effects of the conflict,” he said.
