KUALA LUMPUR: Malaysia's manufacturing sector is expected to continue expanding until the end of 2024, following a solid growth in July which marks its highest since February 2023, economists said.
This will be driven by a technology upcycle, recovery in export-oriented sector and rising demand for artificial intelligence.
Semiconductor devices, integrated circuits, transistors and valves' exports collectively made up 67 per cent of electrical and electronics (E&E) exports in 2023, amounting to RM387.45 billion (US$84.95 billion), according to Malaysia External Trade Development Corporation.
The data released by the Department of Statistics (DOSM) on Tuesday showed that the manufacturing sector's sales value recorded the highest growth since February 2023, amounting to RM157.1 billion in July, up 9.1 per cent from a year ago.
DOSM said the positive momentum was attributed to contributions from three subsectors. They are E&E products (33.5 per cent), petroleum, chemical, rubber and plastic (26.3 per cent), as well as food beverages and tobacco (18 per cent).
The food, beverages and tobacco subsector grew 16 per cent, followed by E&E products (8.2 per cent) and petroleum chemical, rubber and plastic products (6.2 per cent).
The strong growth in manufacturing sector output by 7.7 per cent expanded the industrial production index (IPI) by 5.3 per cent in July.
Following this, both export-oriented and domestic-oriented industries performed well in July, registering growth rates of 7.8 per cent and 7.5 per cent respectively.
Bank Muamalat chief economist Dr Mohd Afzanizam Abdul Rashid said the IPI should stage a better trajectory in the 2H2024, support by continued demand for semiconductor sector.
Export-oriented and domestic-oriented industries, he added, had been postively contributing to the IPI growth.
Continued demand for semiconductor sector will expand manufacturing sector further.
"The World Semiconductor Trade Statistics has forecasted global semiconductor sales to grow by 16 per cent in 2024 and 12.5 per cent in 2025 led by higher growth in integrated circuits (ICs). So the technology upcycle would be the main upside risks to Malaysia's IPI," Mohd Afzanizam told Business Times.
IDEAS Malaysia economist and assistant research manager Doris Liew said semiconductor is experiencing a recovery wave as the global technology upcycle reaches Malaysia's downstream stages of packaging, assembly and testing.
She noted that that increasing adoption of artificial intelligence (AI) and electric vehicles (EV) boosted the demand for E&E and semiconductor components.
Concurrently, Liew said the momentum in domestic manufacturing sector is expected to persist through the end of 2024 and will likely extend into 2025.
This will be fuelled by higher-than-pre-pandemic foreign direct investment in the sector over the past three years.
"The establishment of the Selangor IC design park, Johor-Singapore Special Economic Zone, and government policies supporting high-value, high-growth industries are further driving the growth momentum in E&E sector.
"The increasing investments in data centers will also contribute to the sector's expansion," she said.
On the downside risk, Mohd Afzanizam said it would stem from sharp slowdown in the US, China and other major economies.
Meanwhile, Liew noted that the ongoing geopolitical tensions in regions like the Suez Canal, which have led to supply chain disruptions and increased shipping costs is the key concern.
"Any escalation in these tensions could negatively impact the flow of goods and components, affecting production timelines and costs.
"Additionally, the weak US employment data, China's domestic economic weakness, and the looming threat of a US recession could lead to declining consumer demand for electronics," she said.