KUALA LUMPUR (March 4): Malaysia’s factory activity is expected to recover in the months following latest data indicating the mildest downturn in the manufacturing sector in one and a half years, economists said.

The seasonally adjusted Malaysia manufacturing purchasing managers index (PMI) rose to 49.5 in February, the highest level since September 2022. A reading above 50 indicates expansion in manufacturing activity, while below-50 points to contraction in the sector.

“In the near term, Malaysia's purchasing managers' index is likely to mirror global trends” and may rise above the 50-point mark, said Public Investment Bank. The expected growth in the global semiconductor market “heralds a pivotal period for Malaysia's manufacturing sector”, the research house noted.

Shipments of electrical and electronic products, including semiconductors, typically account for over 40% of Malaysia’s total gross exports.

Manufacturing activity in Malaysia has mostly lagged that of other factory hubs in Asia including South Korea and Taiwan which have since rebounded back into expansion, amid downturn of key trading partner China. Within Southeast Asia, Singapore and Vietnam have bounced into growth earlier.

China’s manufacturing sector has been in contraction for the fifth consecutive month, with PMI falling to 49.1 in February, according to its National Bureau of Statistics. In contrast, the Caixin-Markit PMI Manufacturing, which focuses more on smaller, private enterprises, edged up to 50.9.

“The improving Malaysia’s manufacturing PMI signals for further expansionary external trade performance in the coming months,” said MIDF Amanah Investment Bank. Further, regional trade particularly Asia may stay on an “upward trajectory”, it noted.

Going forward, MIDF said it is optimistic that Malaysia’s external trade would recover steadily this year with exports expanding 5.2% this year, underpinned by growing global demand and stable commodity prices.

S&P Global, which compiles Malaysia’s PMI survey, said data suggests that both gross domestic product and manufacturing production are set to “trend upwards and improve modestly” in the first quarter of 2024.

Manufacturing goods exports are expected to grow 5.5% this year following a 5.3% contraction in 2023, according to official forecasts. Broadly, the government projects the economic growth to pick up to 4.0%-5.0% this year from 3.7% in 2023.