KUALA LUMPUR, April 3 — The manufacturing sector continued its slump for the first quarter of 2017, extending the marginal contraction for the second year running.

Nikkei Malaysia, in its Manufacturing Purchasing Managers Index (PMI) report, said the latest decline mostly reflected the drop in new orders while output rose for a second month in a row, albeit modestly, with higher production used to build warehouse inventories.

The index — a composite single-figure indicator of manufacturing performance — posted 49.5 in March, little changed on February’s 49.4. The slight improvement in the PMI may have been the best reading in two years.

"As noted, falling volumes of new orders continued to undermine the PMI during March. Latest data indicated a twenty-fifth consecutive monthly fall in new work, with the rate of contraction accelerating slightly since February and remaining solid," Nikkei Malaysia said in its report.

"New orders from abroad also fell, albeit at a marginal pace. Panellists commented on underwhelming client demand, both at home and abroad".

Meanwhile, manpower shortages were reported while hiring broadly remained unchanged despite complaints that the slowdown in growth could have been caused by a labour deficit.

Despite this, Malaysian manufacturers were able to boost output at their plants in March, pushing backlogs of work to rise and prompting concern over future activity given the ongoing poor trend in sales.

Overall confidence in the sector remained low for the fourth month running as worries about the relatively underwhelming economic conditions persist.

Inflationary pressure is also adding to the problem. Price pressures remained strong heading into the second quarter of 2017 as the low ringgit continued to push costs up.

Nikkei Malaysia said latest data showed that input prices rose at the second fastest rate in the survey history, surpassed only by the pace seen in February.

At the same time, a similar trend was seen for output charges, which continued to increase sharply as manufacturers sought to protect margins despite decreased demand for their goods.