ASEAN manufacturing sector contracts after 16 months

[WORLD] The manufacturing sector in Southeast Asia has entered contraction for the first time in 16 months, according to the latest S&P Global ASEAN Manufacturing Purchasing Managers’ Index (PMI) released in early May. The PMI fell to 48.7 in April 2025, down from 50.8 in March, signaling the sharpest deterioration in operating conditions across the region since August 2021. This development ends a period of steady, albeit modest, growth and raises concerns about the near-term outlook for one of ASEAN’s key economic pillars.

The downturn aligns with broader global trends, as manufacturing activity in major economies like China and the Eurozone also showed weakness in recent months. Sluggish consumer spending in Western markets, coupled with elevated inventory levels among retailers, has dampened demand for ASEAN’s exports. Additionally, geopolitical tensions and trade policy shifts—such as the U.S.-China tariff escalations—have introduced further volatility into supply chains, disproportionately affecting export-reliant economies in the region.

PMI Falls Below 50: The April reading of 48.7 marks the first time the index has dropped below the neutral 50.0 threshold since December 2023, indicating contraction in the sector.

Output and New Orders Contract: Both output and new orders saw renewed and solid declines, ending growth streaks of 13 and six months, respectively. These downturns are the most significant in 44 months.

Purchasing and Inventory Cutbacks: Manufacturers reduced their input purchases for the first time in six months, and input holdings were pared back for the first time in three months. This reduction in purchasing activity also led to a slight improvement in supply chain conditions—the first in a year, though only marginally.

The inventory drawdowns suggest manufacturers are adopting a "wait-and-see" approach amid uncertain demand. This caution mirrors trends seen during past economic slowdowns, where firms prioritized liquidity over expansion. However, analysts note that prolonged inventory reductions could exacerbate the downturn by weakening upstream suppliers, particularly small and medium enterprises (SMEs) that dominate ASEAN’s industrial ecosystems.

Job Shedding Intensifies: The sector recorded a second consecutive month of job cuts, with the rate of workforce reduction at its highest since April 2024.

Business Confidence Slumps: Sentiment regarding the year-ahead outlook dropped to its lowest point since July 2020, reflecting deepening uncertainty among manufacturers.

“Both output and new orders recorded renewed contractions, accompanied by reduced purchasing activity and a deepening downturn in job shedding. Even more troubling was the slump in confidence observed in April, which reached a 57-month low, signalling a significant loss in sentiment among manufacturers,”

Regional and Sectoral Context

ASEAN’s Manufacturing Importance

The ASEAN manufacturing sector is a critical driver of regional growth, contributing significantly to GDP and global trade. The region’s manufacturing market is projected to grow from 1.7trillionin2018to1.7trillionin2018to2.3 trillion by 2029, buoyed by cost competitiveness, strategic location, and a large, skilled workforce. ASEAN’s role in global supply chains has expanded as multinational companies diversify away from China, attracted by lower labor costs and government incentives.

Despite the current contraction, foreign direct investment (FDI) into ASEAN manufacturing remains robust, with Vietnam, Thailand, and Malaysia continuing to secure major commitments in electronics and electric vehicle (EV) production. For instance, Vietnam’s FDI inflows hit a record $18 billion in Q1 2025, driven by tech and automotive giants relocating operations from China. This suggests that while short-term demand is weak, the region’s structural advantages continue to attract long-term investors.

Country-Level Performance

While the PMI aggregates data from across the region, individual ASEAN economies have unique strengths:

Vietnam: Electronics, textiles, and apparel

Indonesia: Automotive, textiles, and resource-based manufacturing

Thailand: Automotive and electronics

Malaysia: Semiconductors and high-tech manufacturing

Philippines: Electronics assembly and shipbuilding

Singapore: Advanced manufacturing and R&D

Recent months had seen moderate growth in countries like Vietnam and Thailand, while Indonesia and Cambodia faced external demand pressures. However, the latest PMI data suggest that contraction is now more widespread.

Factors Behind the Downturn

Several factors contributed to the sector’s contraction:

Weakening Demand: Both domestic and international demand for manufactured goods have softened, with new orders and output declining sharply.

Cautious Purchasing: Firms are scaling back on input purchases and inventory, reflecting uncertainty about future demand.

Labor Market Pressures: Continued job shedding points to cost-cutting and efficiency drives amid weaker sales.

Softening Cost Pressures: On a positive note, cost inflation has eased, with input costs rising at the slowest pace in four and a half years.

Currency fluctuations have also played a role, with some ASEAN economies experiencing volatile exchange rates against the U.S. dollar. While a weaker local currency typically boosts export competitiveness, it raises the cost of imported raw materials—a double-edged sword for manufacturers reliant on global supply chains. For example, the Thai baht and Malaysian ringgit hit multi-year lows in April, squeezing profit margins for firms with dollar-denominated debt or energy imports.

Implications and Outlook

Short-Term Challenges

The contraction raises immediate concerns for the region’s economic momentum. S&P Global warns that the decline “raises concerns about the sector's ability to recover in the near term and suggests that firms may be bracing for further challenges ahead”. The slump in business confidence to multi-year lows further underscores the uncertain outlook.

Long-Term Resilience

Despite the current setback, ASEAN’s manufacturing sector retains strong fundamentals. The region’s strategic location, competitive labor costs, and government support for Industry 4.0 and digital transformation are expected to drive long-term growth. Adoption of automation, AI, and IoT technologies is anticipated to boost productivity and efficiency, particularly in high-tech sectors.

Industry groups are urging governments to accelerate public-private partnerships to mitigate the downturn. Proposals include targeted subsidies for energy-intensive industries, faster approval of green manufacturing projects, and expanded trade agreements to diversify export markets. For instance, the Regional Comprehensive Economic Partnership (RCEP) could gain renewed focus as a tool to stabilize regional trade flows.

Industry and Policy Responses

Governments across ASEAN are likely to respond with measures to support the sector, including incentives for innovation, infrastructure investment, and workforce upskilling. The focus on sustainable and advanced manufacturing is expected to continue, positioning the region for recovery and future growth.

The first contraction in ASEAN’s manufacturing sector in over a year signals a challenging period ahead for the region’s industrial base. While cost pressures have eased and supply chains have shown marginal improvement, declines in output, orders, and confidence point to broader headwinds. Policymakers and industry leaders will need to navigate these challenges while leveraging ASEAN’s long-term strengths to sustain its role as a global manufacturing powerhouse.