Malaysia's manufacturing sector improves in July

Export growth returns for first time in eight months as business confidence strengthens

Malaysia's manufacturing sector showed encouraging signs of stabilisation in July, with exports returning to growth for the first time since November and business confidence reaching a five-month high.

The S&P Global Malaysia Manufacturing Purchasing Managers' Index (PMI) rose to 49.7 in July from 49.3 in June, moving closer to the 50.0 threshold that separates growth from contraction. The reading marked the softest deterioration in sector health for five months, suggesting the worst may be behind Malaysian manufacturers.

The most encouraging development came from export orders, which grew for the first time in eight months. This turnaround helped offset continued weakness in domestic demand and provided a foundation for cautious optimism about the sector's prospects.

New orders overall declined only fractionally, representing the smallest reduction in the current five-month sequence of contraction. The near-stabilisation of demand conditions encouraged manufacturers to begin rebuilding their operations.

"Malaysian manufacturers saw pressure on operating conditions soften at the start of the second half of 2025," said Usamah Bhatti, Economist at S&P Global Market Intelligence. "New orders were only fractionally lower than in June, owing in part to an expansion in export sales for the first time in eight months."

Manufacturing output continued to fall in July but at the mildest pace since February. Companies attributed the production cuts primarily to subdued local demand conditions, though the rate of decline has steadily moderated in recent months.

The improvement in demand conditions is consistent with expectations that Malaysia's broader economic growth will continue in the third quarter, with the PMI data suggesting annual increases in official manufacturing production.

In a significant milestone, Malaysian manufacturers increased their purchasing activity for the first time in exactly three years. Though the expansion was marginal, it represented the strongest growth since April 2022 and signalled tentative signs of improving demand conditions.

Companies cited encouraging signals about future demand as the reason for their increased input purchases. However, longer delivery times emerged as suppliers faced shipping delays, with lead times lengthening marginally but to the greatest extent in six months.

Staffing levels remained broadly stable in July after a marginal increase in June, suggesting companies are maintaining their workforce capacity as they prepare for potential recovery. The employment picture has stabilised significantly compared to earlier periods of more pronounced job cuts.

Backlogs of work continued to decline as firms focused on completing existing orders amid the muted demand environment. The rate of backlog depletion accelerated compared to the previous month and was the steepest since February.

Input cost inflation accelerated for the third consecutive month, reaching its highest level since November 2024. Rising raw material prices and a weaker exchange rate were the primary drivers of increased cost burdens for manufacturers.

Companies attempted to pass on some of these higher costs to customers, with selling prices rising modestly. However, the rate of charge inflation remained little changed from the previous month, suggesting manufacturers are absorbing much of the cost pressure to remain competitive.

Looking ahead, Malaysian manufacturers expressed their strongest confidence in five months about the 12-month outlook for output. Companies pinned their hopes on a broad-based recovery in demand and economic conditions, particularly in the domestic market.

The strengthening confidence reflects growing optimism that the sector's current challenges are temporary and that better conditions lie ahead. This positive sentiment, combined with the return of export growth, suggests Malaysian manufacturing may be turning a corner.

The combination of stabilising new orders, export growth, renewed purchasing activity, and strengthening confidence points to a potential inflection point for Malaysia's manufacturing sector. Whilst conditions remain challenging, the trajectory appears to be improving.

"Confidence in the year ahead outlook also gathered momentum during July, with the level of optimism reaching its highest since February," Bhatti noted. "Firms pinned their hopes on a broad-based demand and economic recovery, notably in the domestic market."

The historical relationship between the PMI and official GDP data suggests the third quarter has started solidly, with continued economic growth expected. For Malaysian manufacturers, the key will be whether the tentative signs of recovery can be sustained and strengthened in the coming months.

Malaysian manufacturing enters the second half of 2025 with cautious reasons for optimism. The return of export growth, stabilisation of employment, and first increase in purchasing activity for three years all point to improving underlying conditions.

However, challenges remain, including continued weakness in domestic demand and rising cost pressures. The sector's ability to build on July's positive momentum will depend largely on whether the export recovery can be sustained and domestic conditions improve.