KUALA LUMPUR (May 15): Economists have maintained their 2026 gross domestic product (GDP) projections within the government’s 4%-5% target range despite 1Q numbers coming in slightly higher, flagging rising downside risks in the second half of the year amid external supply shocks stemming from the ongoing Iran war.

Malaysia’s economy expanded 5.4% year-on-year in 1Q2026, slightly above the 5.3% advance estimate but easing from 6.2% in 4Q2025, according to data released by Bank Negara Malaysia earlier on Friday.

In a note following the release of Malaysia’s 1Q2026 GDP data on Friday, Kenanga Investment Bank said external risks are increasingly spilling over into the domestic economy through higher price pressures and persistent supply disruptions.

The research house warned that second-round effects from elevated energy prices and broader cost pressures could erode household purchasing power and dampen consumer sentiment.

“Although the external environment has become more challenging with expected higher-for-longer global interest rates, slower global growth, geopolitical tensions, tariff frictions and volatile commodity prices, we expect the drag on Malaysia to remain manageable,” Kenanga said, maintaining its 4.5% GDP forecast.

It noted that Malaysia’s diversified export base should help cushion the impact, with the electrical and electronic (E&E) sector continuing to benefit from the global tech upcycle.

Meanwhile, UOB Global Economics & Market Research also maintained its 4.5% growth forecast, pending greater clarity on external developments.

According to its note, UOB’s outlook factors in ongoing targeted government support for households and businesses, with more measures expected if conditions deteriorate.

“Oil and key raw material supply risks, and resurgent inflation may weigh on demand and labour market conditions in 2H26, capping upside from existing domestic growth drivers,” it said.

RHB Investment Bank kept its GDP forecast at 4.7%, with a modest upside bias towards 5%, citing no signs of a slowdown in growth momentum heading into 2Q2026 based on its composite leading indicator.

While external risks — including geopolitical tensions and elevated crude oil prices — could eventually push up producer and consumer prices and weigh on demand if prolonged, RHB said these have yet to materially derail domestic growth.

“A strong 2Q2026 print would imply an upside bias towards 5%. However, the extent of spillover effects will depend on the duration and severity of the conflict, as well as the effectiveness of mitigating measures,” it said in its note.