KUALA LUMPUR, April 2 (Xinhua) -- Economists cautioned on Thursday that rising costs linked to ongoing Middle East tensions could weigh on Malaysia's economic momentum, even as the manufacturing sector returned to expansion in March with the Purchasing Managers' Index (PMI) climbing to its highest level in nearly four years.
The March rebound suggests February's weakness was largely seasonal. Activity has normalized and should extend into April, Kenanga Research said in a note.
However, the research house noted that the demand remains uneven with rising logistics, energy and raw material costs due to Middle East tensions, which will remain a key headwind and could limit the pace of recovery.
"Overall, manufacturing performance will hinge on whether demand can outpace rising costs," it said.
While maintaining Malaysia's 2026 gross domestic product (GDP) forecast at 4.5 percent, it noted the risk remains tilted to the downside given ongoing Middle East tensions that could disrupt global energy and transportation costs.
"Still, domestic demand and continued support from the electrical and electronics products (E&E) sector should underpin growth," it added.
While manufacturing activities could pick up in March as signaled by the higher PMI reading, MBSB Research also remained cautious that the near-term business outlook could be constrained by the oil and energy price shocks, elevated production costs and potentially weaker final demand.
While earlier data showed that Malaysia's industrial production (IPI) growth increased to 5.9 percent year on year in January, marking the fastest growth since October 2025, the research house expects a potentially moderate reading in February, tracking the slower export growth and lower PMI.
Meanwhile, TA Research said global conditions have become less favorable, with risks increasingly tilted to the downside amid rising external uncertainties, particularly from the ongoing Middle East conflict.
"As the second-largest contributor to Malaysia's GDP after services, the manufacturing sector remains closely monitored," said the research house, adding that although firms still expect demand to improve, confidence has been weighed down by geopolitical tensions.
The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers' Index (PMI) rose into expansion territory in March, climbing to 50.7 from 49.3 in February.
The latest reading marks the fourth improvement in five survey periods and represents the strongest gain in the sector in nearly four years, underscoring a notable recovery in Malaysia's manufacturing activity, according to S&P Global Market Intelligence's statement on Wednesday.
While this is welcome news following the mild moderation observed midway through the first quarter, the data also highlights several concerning developments, many of which stem from the ongoing conflict in the Middle East, said economist Maryam Baluch with S&P Global Market Intelligence.
According to her, purchasing activity, delivery times, stock levels, and most importantly, price indicators are beginning to show how manufacturers are responding to the current situation.
"Confidence has already fallen to a seven-month low, suggesting that the coming months will bring these concerns further into focus," she added. ■
