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Manufacturing sector: Mixed trends, brighter outlook for 2024

Manufacturing sector: Mixed trends, brighter outlook for 2024

26 Feb 2024

A shift from quantity to quality employment and emphasis on local talents is imperative to foster progressiveness 

The manufacturing sector, despite a marginal rebound of 0.1% growth in the last quarter of last year (4Q23), faces challenges to continue its momentum into 2024 due to the expected moderation of the export-oriented segments. 

According to the Department of Statistics Malaysia (DoSM), while certain sub-sectors such as vegetable and animal oils and fats experienced growth, declines in electrical, electronics and optical products restrained the overall sectoral performance. 

Private economists and analysts, however, are more optimistic of 2024’s brighter outlook as the 4Q23 economic performance indicated a growth rebound in the manufacturing and mining and quarrying sectors, as well as expansion in agriculture. 

Kenanga Investment Bank Bhd reported that Malaysia’s 4Q23 GDP figures (at 3.4% is a slight uptick from the preceding quarter’s 3.3%) offers invaluable insights into the countr y’s economic landscape against the backdrop of global certainties and domestic challenges. 

The impact of expanding sectors were softened marginally due to the weaker growth in the services and construction sectors.

The manufacturing sector individually experienced a slight rebound, growing by 0.1% compared to a marginal contraction in the previous quarter, supported by activities such as manufacturing of vegetable and animal oils and fats, non-metallic mineral products, and basic metal and fabricated metal products. 

However, the growth momentum was limited by declines in electrical, electronics and optical products, and petroleum, chemical, rubber and plastic products. 

The report also states that the performance of growth in 2023 was primarily hindered by a weak manufacturing export-oriented sector, influenced by China’s fragile post-pandemic recovery.

It was exacerbated by extended global supply chain disruptions resulting from escalating geopolitical tensions, notably the Russia-Ukraine war and the Israel-Gaza conflict.

Of which, evidence was seen in the subdued Manufacturing Purchasing Managers’ Index (PMI) in December, which remained in contraction since August 2022. 

Additionally, exports experienced a decline throughout the year, with full-year growth contracting by 8%. 

Despite these challenges, the expectation is that domestic demand will continue to support GDP growth. 

This is supported by projected improvements in the unemployment rate for 2024 and sustained growth in distributive trade sales due to increased tourist arrivals and spending. 

Furthermore, the anticipated recovery in the manufacturing sector, potentially driven by an electronics and electrical (E&E) upcycle particularly in the second half of 2024 (2H24), coupled with China’s gradual recovery, bodes well for the domestic growth outlook. 

Consequently, the GDP growth forecast for 2024 is maintained at 4.9%, falling within the Finance Ministry’s projection range of 4%-5%. 

DoSM in its latest quarterly GDP release said, the overall growth for 2023 moderated to 3.8%, marking a significant decline from the previous year’s robust 8.7%. 

The figure fell short of initial projections, with the housing forecast standing at 3.7% and Bloomberg’s consensus at 4.1%. 

On a positive note, the mining and quarrying sector witnessed a notable rebound of 3.7% in 4Q23, primarily fuelled by expansions in natural gas and crude oil and condensate production, contributing positively to GDP growth after a previous quarter of contraction. 

The agriculture sector also showcased resilience with a consecutive expansion of 1.2% in 4Q23, driven by improved palm oil production amid fluctuating economic conditions. 

For the service sector, while it sustained overall growth momentum, it witnessed a slight moderation to 4.7% growth in 4Q23. Contributions from sub-sectors such as wholesale and retail trade, transport and storage, and business services played a crucial role in sustaining growth. 

The construction sector, however, witnessed a sharp moderation to 2.5% growth in 4Q23, notably in civil engineering and residential building sub-sectors. 

Government’s Role 

While approximately half of Malaysia’s GDP originates from the services industry, manufacturing retains significant importance for the Malaysian economy, particularly due to its concentration in key areas such as Penang; Kulim, Kedah; the Klang Valley; and Johor, where high-value manufacturing hubs are situated. 

Global data and business intelligence platform Statista anticipated that this year, the manufacturing market would witness substantial growth across various key metrics. 

The value added in the sector is forecasted to reach US$118.5 billion (RM560.51 billion), with a projected compound annual growth rate (CAGR) of 6.05% from 2024 to 2028. 

Similarly, the output in the manufacturing market is expected to amount to US$726.9 billion in 2024, demonstrating a significant CAGR of 23.68% during the same period.

Moreover, the number of enterprises operating within the manufacturing market is projected to reach 246,500 by 2024, with an anticipated CAGR of 61.62% from 2024 to 2028.Additionally, the number of employees in the sector is expected to reach 4.87 million in 2024, reflecting a CAGR of 19.22% over the forecast period. 

The government in the New Industrial Master Plan (NIMP) 2030 seeks to reform industries and achieve broad-based growth. 

Emphasis is placed on integrating small and medium enterprises (SMEs) into both domestic and global value chains, ensuring equitable distribution of manufacturing benefits across all states. 

As Malaysia attracts more hi-tech and innovation-driven investments, particularly in green manufacturing and renewable sectors, the plan aims not only to enhance labour productivity but also to support Environmental, Social and Governance (ESG) goals. 

This strategic approach ensures continued access to ESG-sensitive markets for Malaysian exports. 

Central to the NIMP 2030 are clear missions aligned with the Madani Economy, positioning Malaysia as Asia’s economic leader through knowledge-based innovations and prioritising the wellbeing of its citizens. 

The plan addresses challenges across sectors and leverages existing and upcoming government policies to ensure alignment and coherence. 

Projections under the NIMP 2030 anticipate significant growth in Malaysia’s manufacturing sector, with manufacturing GDP expected to surge by 61% to RM587.5 billion by 2030. 

Employment opportunities are set to expand, providing livelihood for 3.3 million Malaysians, driven by the creation of high-skilled jobs and advancements in automation. 

Moreover, median salaries in the manufacturing sector are projected to increase by 9.6% to RM4,510, reflecting a shift towards higher value-added activities and the creation of high-skilled job opportunities. 

In pursuit of these ambitious goals, Malaysia aims to attract foreign direct investment (FDI) from global leaders in wafer fabrication, leveraging targeted investment strategies and incentive packages. 

For instance, the US government’s CHIPS Act provides a 25% investment tax credit for semiconductor manufacturing investments in the country. 

Furthermore, the NIMP 2030 places significant emphasis on smart manufacturing, integrating physical and digital processes to optimise operations and enhance efficiency. 

Technologies such as the Internet of Things (IoT), data analytics, artificial intelligence (AI), robotics, cloud computing and cyber security are pivotal in this transformation, facilitating informed decision-making and streamlined production processes. 

The 2024 Budget revealed on Oct 13, 2023, allocated an initial budget of RM200 million for the rollout of the NIMP 2030 programmes and initiatives — which showed the government’s commitment in bolstering the manufacturing sector. 

Key Risks Impacting Growth 

Looking ahead to Malaysia’s economic growth this year, economist Dr Nungsari Radhi was hopeful for a stronger momentum into 2024. 

While 2023 concluded with weaker economic performance compared to the overall annual rate, there is optimism for stronger momentum in 2024. 

He said there were some positive signs in 4Q23, particularly concerning investments, which grew at a faster pace than the overall economy. 

If the trend continues into 2024, it bodes well for overall growth prospects. 

Investments play a crucial role in building capacity, which in turn has positive implications for future economic growth. 

However, it is essential to note that sustainable growth cannot solely rely on consumption expenditures. 

Challenges persist in the tradeable side of the economy, particularly in commodities and manufacturing exports.

While the term “recovery” may not accurately reflect the current situation, Nungsari said it is evident that Malaysia’s economy is experiencing growth. 

However, to sustain the growth trajectory, he believed a focus on increasing investments is crucial, even if certain sectors are not growing as rapidly due to subdued demand. 

The emphasis should be on developing new capacities and capabilities to enhance competitiveness, particularly in the tradeable part of the economy. 

“I believe that both better quality jobs and higher paying jobs depend on us expanding our competitiveness in international trade. That is the only way to do that. 

“To also increase demand for the ringgit and therefore strengthen it fundamentally,” he said in a written reply to The Malaysian Reserve (TMR)

In considering how domestic demand will persist in supporting GDP growth despite external challenges, Nungsari said it is important to acknowledge the factors that define and constrain domestic demand, namely income growth and credit growth. 

Historically, there has been a significant reliance on domestic demand to fuel economic growth. 

However, looking ahead, there is a shift in focus towards investments as the primary driver of long-term and structural growth. 

Although there are concerns about short-term growth, the focus is on closely monitoring investments, acknowledging their crucial role in fostering long-term economic growth. 

While demand and trade are expected to recover over time, he said it is imperative to enter this cycle by implementing improved strategies and initiatives. 

When considering the primary risks or uncertainties that might affect the GDP growth projection for 2024, he emphasised that Malaysia’s capacity to cultivate new capabilities via enhanced investment is pivotal to unlocking brighter prospects for the future. 

This encompasses not only private investments, both domestic and FDI, but also public investments aimed at fostering new capabilities. 

“As long as we build new capabilities, we are looking at better prospects ahead,” he added. 

Therefore, he said it is imperative to prioritise the proportion of the developmental budget within the overall budget, emphasising the need for more optimal spending rationalisation. 

Conversely, a non-resident senior fellow at the Malaysian Institute of Economic Research (MIER) Prof Geoffrey Williams projected a slowdown in Malaysia’s economic growth during the forecasts conducted by economists and analysts in November 2022. 

This outlook was reiterated in the early months of 2023, suggesting that Malaysia would not achieve the earlier forecasted growth target of 4%-5%. 

Recent data suggests that the Malaysian economy is on a path to a modest recovery in 2024, with an expected growth rate of around 3.5%. 

However, he said there is a caveat to this outlook, as there exists a tangible risk that the growth rate could dip even lower than anticipated. 

Furthermore, he said the official estimate of 4%-5% growth depends on higher domestic activity in consumer spending and investment, and stronger international growth — which are all facing significant downside risks. 

Apart from the electricity and plantation sector mentioned in the report, he also highlighted that the gig economy is anticipated to play a significant role in bolstering incomes for millions of individuals across various fields – not just p-hailing but also professional freelance work. 

Williams commented on the expected resilience of domestic demand in sustaining GDP growth despite external challenges, highlighting several factors to consider. He noted that while domestic demand could bolster growth at a modest rate, it is unlikely to propel it to the targeted 4%-5% range unless there are policy adjustments in the short term. 

These adjustments might involve rationalising subsidies and reallocating savings to income support and tax restructuring. An example would be postponing the Sales and Service Tax (SST) increase, similar to what occurred in the traditional and complementary medicine (TCM) sector. 

In terms of consumer spending, he said it remains weak due to higher employment in low-paying jobs, barely keeping pace with the rising cost of living. 

Meanwhile, investment showed some positive improvements but there is a long-term decline in the percentage of GDP devoted to investment. 

On international trade, Williams said it is also weak, with recession and stagnation in major markets and significant geopolitical risk holding back real investment. 

Furthermore, China is facing challenges in returning to its full potential, which serves as a significant growth driver in Asia, upon which Malaysia relies. 

“Government spending and development investment is not forecast to rise very much to compensate. All these factors point to slower than normal growth in 2024 similar to 2023,” he told TMR

Regardless, he believed the key risk that could potentially impact the GDP growth forecast for 2024 include the existing geopolitical risks which have held back global growth through 2023. 

There is also a risk that the subsidies rationalisation programme will be delayed and that overconfidence in the official narrative and forecasts will make the government too cautious on reform. 

Geopolitical Conflicts 

On the other hand, MIER senior research fellow Dr Shankaran Nambiar said that events unfolding in Ukraine or Gaza will exert additional pressure on the Malaysian economy beyond its current impact. 

“The global scenario is not particularly optimistic. On the more pessimistic side, China may not post very vibrant figures, too. 

“I think the rather muted global economic environment will surely be a factor that will impact Malaysia’s export-oriented manufacturing sector,” he told TMR

Furthermore, Shankaran said the main impetus for the sector will come from the E&E sector, particularly from the semiconductor industry. 

“The semiconductor cycle, according to some accounts, is not set to pick up until the latter part of the year. 

“Given this, it is unlikely that we can expect spectacular outcomes from the manufacturing sector for some time,” he added. 

Expanding on this, Socio-Economic Research Centre (SERC) ED Lee Heng Guie said the manufacturing sector contracted further by 0.3% year-on-year (YoY) in 4Q23 from -0.1% in 3Q23. 

The decline was driven by continued decreases in the production of electronics, machinery and equipment, textile and wearing apparel, and wood products. 

He also noted that output growth in food processing, beverages, basic metal products, fabricated metal products, non-metallic mineral products, and leather products has increased. 

Additionally, he mentioned the continued growth in domestic demand, albeit at a slower pace. 

“Growth in construction-related materials, such as basic metal and fabricated metal products, as well as non-metallic mineral products, was supported by the ongoing, albeit slower, growth in the construction sector (3.6% YoY in 4Q23 against 7.2% in 1Q23), ongoing public infrastructure spending and housing development,” he told TMR

Moreover, Lee commented that the export-oriented manufacturing industry was largely dragged down by weak global demand and oversupply of electronics demand, leading to inventory adjustments in the PC segment, consumer electronics and server sectors. 

“This is in tandem with an 8.3% decline in global semiconductor sales, with chip sales falling across different parts of the world, namely in the US (-5.2%), Japan (-3.1%) and China (-14%). 

“Meanwhile, the Red Sea conflict-induced shipping disruptions and higher freight costs have impacted importers in the chemicals, machinery and automotive industries due to delays in supply chain and production timelines, while exporters face minimal disruption amid freight cost increases,” he said. 

However, he expected the manufacturing sector to recover in 2024, gaining higher growth traction to an estimated 3.9% in 2024 from +0.7% in 2023. 

Several current and forward indicators suggest improved growth in the sector. 

“In January 2024, global manufacturing PMI returned to 50 points after 16 consecutive months below the threshold separating between expansion and contraction, signalling an improvement amid persistent challenges in the manufacturing sector. 

“Global semiconductor sales have bottomed out and marked positive growth in January 2024. The tech upturn cycle is seen with global semiconductor sales expected to increase by about 13% in 2024 (-8.3% in 2023),” he said. 

Lee also said Malaysia’s exports increased by 8.7% YoY in January 2024, with exports of E&E products showing a smaller rate of decline. 

“Manufacturers and exporters must be mindful of cost and supply chain management, as well as logistics, to safeguard against the risks of disruption from a wider escalation of the ongoing conflicts in Ukraine-Russia and (between) Israel-Hamas, which could hamper the global economy,” he added. 

Source: The Malaysian Reserve