KUALA LUMPUR, April 1 — Malaysia’s manufacturing sector returned to growth in March for the first time in two months, but this positive development was overshadowed by severe inflationary pressures and weakening business confidence directly linked to the war in the Middle East.

The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 in March, up from 49.3 in February. A reading above 50.0 indicates an expansion in the sector, with the latest data showing the most marked improvement in nearly four years.

This growth was primarily driven by a modest rise in production and a slight increase in employment, as companies added more full-time staff to their payrolls.

However, the report highlights several critical challenges looming over the industry. The ongoing conflict in the Middle East has sharply increased operating costs, with firms reporting the fastest rise in transportation, energy, and material costs since October 2024.

In response, manufacturers passed these costs on to customers by raising prices for finished products at the steepest rate in 45 months, signalling a direct impact on consumers and other businesses.

Demand remained weak, with total new orders falling for the second consecutive month.

The conflict also disrupted supply chains, causing the most significant lengthening of delivery times since May 2022 and forcing companies to cut back on purchasing new materials for the first time in nine months.

To meet production requirements, firms were forced to deplete their existing inventories of raw materials and finished goods.

This combination of rising costs, weak demand, and supply chain instability has soured the outlook for the future. Business sentiment fell to a seven-month low, as optimism for an improvement in demand was “severely dampened by the ongoing war in the Middle East.”

Maryam Baluch, economist at S&P Global Market Intelligence, said the data highlights several concerning developments.

“Purchasing activity, delivery times, stock levels, and most importantly, price indicators are beginning to show how manufacturers are responding to the current situation,” she noted.

“Confidence has already fallen to a seven-month low, suggesting that the coming months will bring these concerns further into focus.”

The US-Israel war against Iran, initiated on February 28, with large-scale airstrikes killing Iran's supreme leader Ayatollah Ali Khamenei, has escalated into a month-long conflict involving Iranian missile and drone retaliations across the Gulf region, disrupting the Strait of Hormuz and targeting energy infrastructure.

This caused Brent crude prices to surge over 50 per cent  to above US$100 (RM400) per barrel, triggering a global energy crisis, supply chain chaos for semiconductors, helium, and fertilizers, and heightened freight expenses.