Manufacturing sector sees 3rd month of contraction

This concerning trend mirrors the overall economic landscape, with IPI experiencing a slight decline to 0.3% in August compared to 0.7% in July 


IN SEPTEMBER, Malaysia’s manufacturing sector grappled with its third consecutive month of contraction, with a notable 3.3% year-on-year (YoY) decline in sales value. 

This concerning trend mirrored the overall economic landscape, with the Industrial Production Index (IPI) experiencing a slight decline to 0.3% in August compared to 0.7% in July.

The manufacturing component of the IPI also remained in contraction for a third straight month, registering a YoY decline of -0.6% in September (compared to -0.2% in July). 

Further accentuating the challenges faced by the manufacturing sector, the manufacturing Purchasing Managers’ Index (PMI) continued its downward trajectory, dropping to 46.8 in September, following a reading of 47.8 in August. 

The extended contraction trend revealed by the PMI is note-worthy, as it marked the thirteenth consecutive month of manufacturing conditions remaining in contraction territory. 

The main contributors to this persistent downturn were reduced demand, declining employment figures, rising prices, and higher input costs. 

The dwindling demand and ongoing manufacturing slowdown are not isolated events but part of the broader narrative of a global economic slowdown. 

A key indicator of this scenario is the decline in exports, which have contracted for six consecutive months. 

In August, Malaysia’s exports experienced a sharper decline of 18.6% YoY, compared to 13% in July. 

Of particular concern is the YoY drop of 17.7% in exports of manufactured goods for the third consecutive month (compared to -9.7% in July). 

While there is a silver lining in the form of a month-on-month rebound in sales value, posting a 5.8% increase in September compared to the negative 2.4% recorded in July, and an IPI increase of 2.8% month-on-month (in contrast to a 1.8% decrease in July), headwinds continue to affect the manufacturing sector.

According to BIMB Securities Research, these mixed economic indicators paint an uncertain picture for the Malaysia’s manufacturing sector. 

“We remain hesitant to call for a manufacturing recovery solely on the monthly positive print in the soft data and would require further improvements and sustained expansionary readings for greater certainty on the progress of manufacturing recovery. 

“The latest manufacturing data still correlates with our view that Malaysia is experiencing headwinds in the manufacturing sector. Hence, the overall outlook for the manufacturing sector appears fragile given the weak external demand, which could persist for the rest of 2023, exacerbated by tight financial conditions stemming from an elevated interest rate environment,” it said.

It noted that the ongoing contraction in the manufacturing PMI, coupled with significant declines in manufacturing sales and exports, are causes for concern. 

These factors, it said, emphasise that the electronics downcycle, and more broadly, the trade downcycle, has yet to hit its lowest point. 

“With external demand likely to weaken further, we expect the weakness in manufacturing activity to persist for the rest of the year with multiple indicators pointing towards challenges in both domes- tic and international markets. 

Consequently, it said, the manufacturing sector is anticipated to remain lacklustre, with a cautious outlook on manufacturing performance and trade. 

Any signs of recovery, it noted, are unlikely to emerge until at least the first quarter of 2024.

  • This article first appeared in The Malaysian Reserve weekly print edition