Chip demand boosts manufacturing outlook

PETALING JAYA: Domestic manufacturing activities are expected to remain supportive of the economy driven by demand for semiconductor chips in the coming months, despite the contraction in the S&P Global Malaysia manufacturing purchasing managers’ index (PMI) for September.

The September PMI data released on Oct 1 showed a contraction to 49.9, the first time in four months.

The manufacturing PMI gauges the health of the manufacturing sector, with a rise above the neutral 50-mark indicating expansion.

Economists tracking the latest PMI data and other forward indicators expect the Malaysian economy to grow despite the external uncertainties and the looming hike in the minimum wage likely to be announced in Budget 2027 on Oct 9.

TA Research said the third quarter of financial year 2026 (3Q26) outlook remains solid for the economy based on the historical relationship between the PMI and gross domestic product (GDP) data.

“Manufacturing production is also expected to remain in growth territory, albeit with some moderation.

The PMI averaged 50.3 in 3Q26, down from 50.7 in 2Q26, pointing to broadly stable manufacturing conditions despite softer momentum.

“Accordingly, we expect manufacturing growth to remain positive in 3Q26 and 4Q26, although at a more moderate pace than in the first half of financial year 2026 (1H26),” it said.

This supports its forecast for GDP growth to ease to 4.6% in 2H26 from 5.7% in 1H, bringing full-year growth to 5.1%.

BIMB Research said strong global demand for chips and artificial intelligence (AI)-related products should help underpin manufacturing activity and exports, supporting a gradual improvement in the sector despite external uncertainties, including elevated energy prices and geopolitical tensions in the Middle East.

“Against this backdrop, we project Malaysia’s industrial production index (IPI) and goods exports to grow by 4.8% (year-to-July 2026: 5.7%) and 23.4% (year-to-August 2026: 31.2%), respectively, in 2026.

“The IPI measures industrial output across manufacturing, mining and utilities.

“While export growth is expected to moderate from current year-to-date levels, it should remain elevated due to strength in electrical and electronics (E&E) exports and favourable base effects.

It noted that the manufacturing sector may face a “cost shock” from a new monthly minimum wage of RM2,000 widely expected to be announced in Budget 2027.

It added that the biggest impact would likely fall on labour-intensive manufacturing subsectors where average pay remains below RM2,000.

These subsectors include apparel, food processing, footwear, metal products and transport equipment.

“Higher wages could mean higher labour costs and margin pressure, particularly for firms with a large lower-wage workforce.

Phillip Capital Research said Malaysia’s PMI sub-indices suggest growth may differ across industries, particularly between E&E and non-E&E segments, despite macroeconomic indicators pointing to rapid expansion in the manufacturing sector as a whole.

“While the E&E sector has benefitted from the global AI-driven upcycle, non-E&E sectors have been negatively affected by prolonged geopolitical tensions and disruptions to crude oil supply chains in the Middle East,” it said, adding that agricultural production has also been affected by El Nino conditions and the outlook for the year remains difficult to assess.

Furthermore, it said despite these uncertainties, Phillip Capital Research expects the E&E segments to outperform the non-E&E segments supported by the global AI-driven semiconductor upcycle.

“This should continue to support overall manufacturing activity and economic growth in the near term.”