Malaysia’s manufacturing sector lost some momentum in May, with the Manufacturing Purchasing Managers’ Index (PMI) easing to 49.9 from 51.6 in April as softer domestic and external demand weighed on output, according to Kenanga Research.
The latest reading marked a retreat from April’s four-year high and slipped marginally below the 50-point threshold that separates expansion from contraction. However, Kenanga noted that the data still points to broadly stable manufacturing activity rather than a significant downturn.
The moderation was primarily driven by weaker demand conditions, which resulted in slower production and softer order flows during the month.
Output growth stalled after two consecutive months of expansion as manufacturers faced weaker demand from both domestic and overseas markets. New orders also moderated, partly due to higher selling prices that affected sales growth.
Export demand remained particularly weak, with new export orders contracting for a third consecutive month and recording the sharpest decline since October amid softer global demand conditions.
Despite weaker sales, manufacturers continued to increase purchasing activity for a second straight month, largely as a precautionary measure against potential supply disruptions and higher raw material costs linked to ongoing geopolitical tensions in the Middle East.
Businesses also sought to build inventories ahead of anticipated price increases, helping to stabilise pre-production stock levels, which declined at a slower pace compared with previous months.
Cost pressures remained elevated throughout the sector, driven mainly by higher fuel and raw material prices. However, the pace of input cost inflation eased slightly compared with earlier months.
Manufacturers were also more cautious in passing on higher costs to customers. Output price inflation slowed from its previous record high as firms sought to remain competitive in an increasingly challenging demand environment.
Employment conditions remained subdued, with hiring activity largely unchanged. While some companies reported modest increases in staffing levels, many adopted a wait-and-see approach amid uncertain market conditions.
Business confidence, however, improved to its highest level since February, with manufacturers expressing optimism that production would increase over the next 12 months.
Across the region, manufacturing performance remained mixed.
Taiwan emerged as one of the strongest performers, with its PMI rising to 56.1 in May from 55.3 in April, reaching the highest level since July 2021. The expansion was driven by stronger output, new orders and inventory accumulation.
Japan’s manufacturing PMI eased slightly to 54.5 from 55.1 but remained firmly in expansion territory, supported by resilient demand and inventory building amid rising costs linked to Middle East tensions.
Looking ahead, Kenanga believes precautionary inventory accumulation could continue to support Malaysia’s manufacturing activity in the near term. However, the research house warned that such support may prove temporary if underlying demand continues to weaken and cost pressures remain elevated.
“The slight dip in PMI below 50 signals easing momentum after earlier strength, with underlying demand weakening as higher prices begin to weigh on activity,” the research house said.
While high-frequency indicators suggest Malaysia’s economic growth remained relatively firm in the second quarter, supported by festive spending, resilient domestic consumption and inventory-related activities, Kenanga remains cautious about the outlook for the second half of 2026.
The research firm cited risks from slowing demand and persistent cost pressures as key challenges facing manufacturers and the broader economy.
Despite these concerns, Kenanga maintained its 2026 gross domestic product (GDP) growth forecast at 4.5%, reflecting what it described as a balanced risk profile for the Malaysian economy.
