PETALING JAYA: Rising inflationary pressures are emerging as a key risk to Malaysia’s manufacturing recovery, even as the sector returned to expansion last month in March.
Operating conditions improved thanks to stronger production and a modest pickup in employment.
However, escalating costs for transportation, energy and raw materials are weighing on the broader outlook.
These pressures were largely linked to ongoing geopolitical tensions in the Middle East.
Cost pressures rose for a second consecutive month in March, with inflation hitting its fastest pace since October 2024, according to TA Research.
Data from S&P Global showed the seasonally adjusted Malaysia manufacturing purchasing managers’ index (PMI) climbed to 50.7 in March from 49.3 in February, signalling a return to growth after the previous month’s contraction.
“The latest expansion marks the strongest pace of growth in nearly four years,” TA Research said.
The survey also showed production expanded at its fastest pace since December 2021, supported by firmer demand and new tender wins, while employment edged up after two months of decline.
However, demand remained mixed.
Total new orders moderated for a second consecutive month and export orders fell for the first time in three months.
Looking ahead, TA Research expects Malaysia’s economy to grow about 5.4% year-on-year (y-o-y) in the first quarter of the year but cautioned that external risks remain tilted to the downside, with business sentiment softening amid persistent geopolitical uncertainties.
“Global conditions have become less favourable, with risks increasingly tilted to the downside amid rising external uncertainties, particularly from the ongoing Middle East conflict.
“As the second-largest contributor to Malaysia’s gross domestic product (GDP) after services, the manufacturing sector remains closely monitored.
“For now, our 2026 GDP forecast remains at 4.3% to 4.7% y-o-y,” TA Research said.
Meanwhile, MBSB Research said the latest PMI data was primarily fuelled by the fastest acceleration in production since late 2021, a recovery that’s being underpinned by strengthening domestic demand and successful new tender acquisitions.
“Supporting this output growth, the labour market stabilised with a fractional increase in employment, effectively ending a two-month sequence of job cuts.
“However, the report also surfaced significant external vulnerabilities; total new orders moderated for the second consecutive month, while international demand softened for the first time since the start of the year, leading firms to scale back purchasing activity and draw heavily on existing inventories,” MBSB Research noted.
These cautious procurement strategies are largely a response to intensifying supply-side pressures, as input cost inflation surged to its highest level since October 2024, according to the research house.
“Driven by the compounding effects of the Middle East conflict on energy, transport, and raw material costs, manufacturers pushed output price inflation to a 45-month high to preserve margins.
“Business sentiment has dampened to a seven-month low, reflecting heightened industry concerns over the sustainability of demand amidst escalating global cost pressures,” MBSB Research added.
