Rising global trade tensions, direct US tariffs and weakening global demand are expected to cast long shadow in the months ahead
by RUPINDER SINGH
MALAYSIA’S manufacturing sector may have delivered a stronger-than-expected performance in March, but economists are cautioning that this could be the calm before the storm.
A confluence of rising global trade tensions, direct US tariffs and weakening global demand is expected to cast a long shadow over the country’s industrial outlook in the months ahead.
In a recent report, RHB Investment Bank Bhd (RHB Research) warned that the manufacturing sector faces “mounting challenges” from escalating US trade measures and slowing external demand — particularly from major economies like the US and China.
While March’s Industrial Production Index (IPI) rose by 3.2% year-on-year (YoY) — beating both in-house and consensus expectations — this was largely driven by a sharp rebound in the mining sector, which posted 1.9% YoY growth after months of contraction.
Manufacturing output, meanwhile, grew 4% YoY in March, a slight dip from February’s 4.8%. Key contributors included electronics, optical products and food processing.
Yet, despite the headline resilience, the underlying sentiment appears far more fragile. The S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) eased further to 48.6 in April, marking its lowest level since July 2023.
Employment softened slightly, and business confidence has notably deteriorated.
The report underscored that Malaysia is now a direct target of US protectionist policies. A 10% US tariff on Malaysian exports is already in effect and could rise to 24% once a 90-day suspension expires.
While exporters may see a short-lived boost from front-loading shipments during this window, the overall outlook remains subdued.
“Lingering uncertainty and potentially weaker global demand may continue to weigh on Malaysia’s manufacturing sector in the months ahead,” RHB Research said.
Export-heavy industries — particularly electronics and electrical (E&E), crude materials and machinery — are expected to be hit the hardest.
While semiconductors are not yet subject to tariffs, RHB Research flagged the risk of future inclusion, citing recent political rhetoric in the US around blanket duties on imported chips. The broader economic implications are also troubling.
RHB Research’s 2025 GDP forecast currently stands at 4.5%. However, should trade tensions escalate further, the balance of risks now tilts towards a lower growth range of 3.5% to 4%. The 10% US tariff on Malaysian exports could reduce GDP by 0.1%.
Additionally, the hefty US tariffs on China and a slowdown in China’s GDP — to 4% or even 3% — could lead to a further downside of 0.8% to 1.1% for Malaysia’s GDP.
In a worst-case scenario, should tariffs rise to 24% after the 90-day pause, it said that Malaysia could face an additional 0.2% to 0.3% GDP contraction on top of the 10% downside.
On a more technical note, the temporary uptick in IPI may modestly lift Malaysia’s first quarter (1Q) GDP estimate, thanks largely to the smaller-than-expected contraction in the mining sector.
But RHB Research stressed that this does not fundamentally change the trajectory.
Manufacturing IPI growth for the quarter stood at 4.2% YoY — flat versus the earlier estimate — while capital goods imports continue to trend downward, suggesting weaker business investment ahead.
Retail trade and construction, which are largely domestically driven, are expected to remain resilient. However, they are unlikely to offset the anticipated drag from export sectors.
Any trade diversion benefits from US-China tensions — given ASEAN’s relatively lower tariffs — are expected to be modest and short-term.
In short, while the March data may offer a temporary reprieve, the risks to Malaysia’s industrial economy are very real.
As RHB Research put it, “The balance of risks now tilts towards a lower growth range of 3.5% to 4.%” for the year, unless trade tensions ease meaningfully.
With sentiment softening and headwinds mounting, policy-makers and industry players alike may soon be forced to confront an uncomfortable truth: The external environment that once powered Malaysia’s manufacturing engine could now be turning against it.
- This article first appeared in The Malaysian Reserve weekly print edition
The post Trade tensions cloud manufacturing outlook despite March rebound appeared first on The Malaysian Reserve.
