Malaysian manufacturing slips into contraction in May as demand weakens
PMI fells from a 2-month high as new orders and output both ease.
Malaysia’s manufacturing sector edged back into contraction territory in May as sluggish demand conditions reversed the brief recovery seen in April, with firms pulling back on hiring and output as new business dried up at home and abroad.
The S&P Global Malaysia Manufacturing PMI fell to 49.9 in May from 51.6 in April — dropping fractionally below the 50.0 threshold that separates growth from contraction and ending two consecutive months of improvement. The reading nonetheless sits close enough to neutral to suggest that official manufacturing output and GDP data for the second quarter are likely to show continued solid, if softening, growth, based on the historical relationship between the PMI and national statistics.
The retreat in the headline figure was driven by a renewed fall in new orders. Manufacturers cited weak underlying demand and noted that recent price increases had dampened sales. Export orders fared worse still, declining for the third month running and at the sharpest rate since October last year, as overseas customers pulled back amid global trade uncertainty.
Output fell modestly in May after two months of increases. With new work easing, however, firms were able to draw on spare capacity to chip away at their backlogs, reducing outstanding business at a modest rate.
Employment was broadly unchanged on the month. Whilst some companies added to their headcounts, these gains were cancelled out by resignations, redundancies, and difficulties sourcing suitable workers. Purchasing activity, meanwhile, rose for the second month in succession — driven not by buoyant demand but by a desire to build buffer stocks and hedge against anticipated raw material price rises linked to the ongoing Middle East conflict.
That conflict continued to push input costs higher through elevated material and fuel prices. The pace of cost inflation eased slightly from April’s recent peak but remained marked. Crucially, firms were far more reluctant than in April to pass those costs on to customers, with selling price inflation easing notably from the series record set the previous month as manufacturers prioritised staying competitive in a softer market.
The one brighter signal came from business confidence, which ticked up for the first time in four months to its highest level since February. Despite the improvement, sentiment remained subdued by historical standards.
Maryam Baluch, Economist at S&P Global Market Intelligence, said that weak demand conditions had led to a softening of operating conditions, with output and new orders retreating after April’s growth. She noted that the PMI’s historical link to GDP data pointed to a moderation in second-quarter growth.
Employment had stabilised after two months of job creation, and whilst confidence had improved, it remained historically muted. The war in the Middle East, she added, continued to drive up material and fuel costs, though firms were more reluctant than before to burden their clients with those increases given the softening in demand.
