Malaysian manufacturing outlook worsens amid Middle East conflict

[KUALA LUMPUR] Malaysia’s manufacturing sector is showing signs of broader stress as the Middle East crisis spreads beyond freight disruptions into raw material shortages, weaker orders, cash-flow strain and mounting job risks, according to a survey released by the Federation of Malaysian Manufacturing (FMM) on Thursday (May 7).

The industry body said conditions have deteriorated further since its first survey on Apr 7, with 72 per cent of 225 respondents reporting worsening operating conditions since early April. About 22 per cent described the deterioration as significant.

“What initially began as a logistics and shipping disruption has now spread across the manufacturing value chain, affecting raw material availability, production planning, investment decisions and employment,” said FMM president Jacob Lee.

The survey highlighted mounting concerns over shortages of key production inputs, particularly petrochemical feedstocks, industrial chemicals, resins, metals and packaging materials.

Inventory depletion threatens factory output

The inventory situation has become critical, as only 40 per cent of respondents hold one to two months of essential materials, while 35 per cent possess less than three weeks of supply.

To mitigate these shortages, 72 per cent of firms are turning to China as their primary alternative source, followed by domestic Malaysian suppliers at 40 per cent, and India and Thailand at 16 per cent each.

However, transitioning remains difficult, largely due to quality or specification mismatches cited by nearly half of the surveyed companies, said the survey.

The findings echo broader signs of strain emerging across the manufacturing sector.

Malaysia’s manufacturing purchasing managers’ index recorded its strongest reading in four years in April. Economists, however, cautioned that the improvement was largely driven by precautionary stockpiling rather than genuine end-demand strength, as companies and customers rushed to build safety inventories amid escalating geopolitical tensions in the Middle East.

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In a recent report, Kenanga Investment Bank said persistently high logistics, energy and material costs, alongside worsening delivery delays, will remain key headwinds as second-round effects from prolonged Middle East tensions begin to surface.

Based on data from S&P Global, input cost inflation surged to a 45-month high in April, driven by rising energy and raw material prices. This also led to a sharp increase in output prices, suggesting manufacturers are increasingly passing higher costs on to customers.

Kenanga said downside risks are expected to intensify in the second half of the year as supply-chain disruptions and cost pressures worsen, although resilient domestic demand may still cushion part of the impact.

Economic outlook faces rising uncertainty

The growing pressure on manufacturers comes as Malaysia’s broader economic outlook becomes increasingly uncertain.

According to an official advance estimate, Malaysia’s economy is expected to expand by 5.3 per cent year on year in the first quarter of 2026 – decelerating from 6.3 per cent growth in the last quarter of 2025, as activity in key manufacturing and services sectors moderated following the escalation of conflict in the Middle East after the large scale US-Israel strikes against Iran at the end of February.

MBSB Research maintained its forecast for Malaysia’s gross domestic product growth to moderate to 4.2 per cent this year, from 5.2 per cent in 2025, with domestic demand expected to remain the main growth driver.

“With the ongoing conflicts in the Middle East, Malaysia’s growth outlook could be weighed down by elevated energy prices, rising inflation and potentially softer external demand,” MBSB said in a recent report.

Meanwhile, Bank Negara Malaysia continues to project economic growth of between 4 and 5 per cent in 2026. The central bank kept the Overnight Policy Rate (OPR) unchanged at 2.75 per cent on May 7, marking the fifth consecutive meeting without a rate adjustment.

In its latest monetary policy statement, the central bank highlighted growing uncertainty surrounding both growth and inflation due to the prolonged Middle East conflict.

While domestic demand and investment remain supportive, the full impact of these geopolitical shocks will be clearer when the final GDP data is released on May 15.

UOB senior economist Julia Goh and economist Loke Siew Ting said businesses are already grappling with surging energy costs and raw material shortages as the conflict enters its 11th week and the Strait of Hormuz remains effectively closed.

They expect the disruption to peak in June and July. “We expect Bank Negara to maintain a wait-and-see approach by keeping the OPR at 2.75 per cent until there is clearer evidence of second-round inflationary pressures or a significant shift in domestic demand,” they added.

Freight costs and cash-flow strain intensify

Against this backdrop, freight and logistics costs remain heavily elevated. About 87 per cent of the respondents in the FMM survey reported higher freight costs compared with pre-conflict levels, as more than half are seeing freight charges increased by between 20 and 50 per cent.

Shipping routes to Europe have lengthened significantly due to rerouting around the Cape of Good Hope. About 86 per cent of respondents said the transit time now takes 35 to 45 days, compared with less than 30 days previously.

The survey also highlighted worsening domestic logistics bottlenecks, particularly between Pasir Gudang and the Port of Tanjung Pelepas, where manufacturers said haulage disruptions linked to diesel quota exhaustion were delaying cargo movements and disrupting export schedules.

Financial pressure is also building steadily across the sector, with 68 per cent of respondents reporting working capital or cash-flow stress, driven by shorter supplier payment terms, delayed customer payments and extended delivery timelines.

At the same time, 68 per cent said customer orders had been reduced or deferred, while 60 per cent reported postponing or cancelling automation, expansion or investment plans.

SMEs and jobs under mounting pressure

The labour market is also beginning to feel the strain. About 28 per cent of respondents said they had already implemented or were planning workforce adjustments due to the crisis.

Common measures include reduced overtime, shorter working hours and hiring freezes, while 5 per cent reported retrenchments.

Small and medium enterprises (SME) appear particularly vulnerable, with FMM warning that prolonged cost pressures and weaker demand could eventually push temporary operational cuts into permanent workforce reductions.

The industry group nevertheless acknowledged the government’s response to the crisis, including the establishment of a Crisis Management Taskforce, weekly meetings of the National Economic Action Council chaired by the prime minister, and a RM5 billion (S$1.6 billion) SME Stabilisation Relief Facility introduced by Bank Negara Malaysia.

Still, FMM’s Lee warned that the broader impact of the crisis may only become more visible over time.

“These effects will not be felt immediately, but they will show up in productivity and industrial competitiveness over the next two to three years,” he said.