PETALING JAYA: The growth pace in the manufacturing sector is sustainable on the strength of investments and external demand coupled with increased domestic industrial activities supported by government policy.
Analysts said this following the release of Malaysia’s May industrial production index (IPI) data on July 9 showing a strong rebound in the mining sector gauge of the index.
Mining output expanded by 19.8% year-on-year (y-o-y) compared to April’s 6.8%.
The IPI, a leading indicator of industrial activities and the health of the economy, rose 8.4% led by the manufacturing sector, where output grew 6.6%. The electricity sector gained 4.2%. On a month-on-month basis, it was a 1.3% turnaround compared to the 3.4% contraction in April.
IPPFA Sdn Bhd investment strategy director and country economist, Mohd Sedek Jantan, told StarBiz manufacturing stood as a sustainable growth engine underpinned by investment, exports and domestic industrial activity.
“Manufacturing remained the largest contributor to overall industrial production, with the electrical and electronics (E&E) sub-sector expanding 14.4% y-o-y, while export-oriented industries grew 8.8%, significantly outpacing the 2% growth recorded by domestic-orientated industries,” he said.
He expects manufacturing to overtake mining as the main driver of industrial production, resulting in a healthier growth mix supported by higher value-added activities and stronger spillover effects across the economy.
Mohd Sedek noted that the strong performance of the mining gauge in May was largely driven by the resumption of production following earlier maintenance activities and supported by favourable base effects, making it difficult to sustain growth at nearly 20% over the coming quarters.
“The government’s priority remains firmly focused on accelerating the energy transition while ensuring that economic growth, industrial expansion and energy security continue to move in tandem,” he added.
This can be seen in the spillover effects from stronger domestic gas production, as the IPI’s mining gauge indicates, because gas production provides stable, lower-carbon power supply to meet rising energy demand from semiconductor manufacturing, artificial intelligence (AI) infrastructure and data centres (DCs).
Natural gas also acts as a bridge feedstock for power supply as Malaysia transitions to renewable energy feedstock.
Similarly, chief economist for the Asia-Pacific region of Coface, Bernard Aw, struck a cautious note, saying the mining sector may not remain a strong contributor as natural gas output tends to be volatile, influenced by maintenance schedules and field-specific operational factors.
While factory output has held up well in the first half of the year (1H) and supported economic growth, Kenanga Research expects the index to ease in 2H as the effects of precautionary stockpiling fades.
But Socio-Economic Research Center executive director Lee Heng Guie said export-oriented industries, particularly E&E, will remain the key driver of exports and manufacturing activity. He attributes the projections of slower IPI growth going forward to the unwinding of earlier production ramp-ups and a high base effect from a year earlier.
Mohd Sedek shared this sentiment, noting that the manufacturing sector is anchored by higher value-added industries and long-term investment trends, rather than broad-based cyclical demand.
He said this should cushion the impact of softer exports, allowing manufacturing growth to transition towards a more balanced and sustainable trajectory.
The moderation in growth should be viewed as a return to healthier and more sustainable expansion, rather than losing momentum, he emphasied.
“Malaysia is becoming an increasingly important participant in the global AI and semiconductor supply chain, supported by growing investment in advanced packaging, semiconductor testing, electronics manufacturing services and industrial engineering,” he said.
He added that the country’s strengths extend further into outsourced semiconductor assembly and test or Osat, electronics manufacturing services and precision engineering.
“Global semiconductor sales are projected to reach approximately US$1.51 trillion in 2026, representing almost 90% y-o-y growth, with further expansion expected in 2027.
“Concurrently, global DC capital expenditure (capex) is projected to exceed US$1 trillion, reflecting sustained investment in AI-infrastructure rather than short-term inventory replenishment.
“These trends indicate that demand is increasingly being supported by long-term capex across advanced packaging, semiconductor testing, networking infrastructure and power systems, rather than consumer electronics alone,” he said, adding that rapid expansion of domestic DCs creates significant spillover effects across the sector.
Aw believes the benefits have not sufficiently diffused across the wider manufacturing base to call it a broad-based industrial upcycle.
He pointed to the latest industrial production data, noting export-oriented industries significantly outperformed domestic-oriented industries, with electronics production rising 17% y-o-y.
“Malaysia’s export engine is becoming increasingly concentrated on electronics, semiconductors, DC infrastructure and related technology products.
“That makes overall export performance more dependent on the health of global investment spending, particularly in the United States, China and the broader technology ecosystem,” he said.
Aw highlighted that if AI-related investment spending slows unexpectedly, Malaysia would likely feel the impact disproportionately because much of the recent manufacturing acceleration has been concentrated in precisely those sectors.
On account of risks like trade tensions potentially evolving in 2H of the year, Aw regarded the climate would be beneficial particularly for the economy’s primary growth drivers.
“Trade policy remains an important risk, but I view it as secondary, as some trade tensions have actually benefited Malaysia by encouraging China+1 diversification, semiconductor supply-chain dispersion.
“The greater danger is not tariffs reducing trade flows immediately, but tariffs causing businesses to postpone investment spending,” he added.
While Mohd Sedek acknowledged the external environment’s imperfect landscape, he pointed out that manufacturers are now better prepared than they were a year ago.
“Businesses have diversified their supply chains, broadened their export markets and adapted to a more fragmented global trading environment, improving their resilience to external shocks,” he explained.
