This article first appeared in The Edge Malaysia Weekly on July 20, 2026 - July 26, 2026

MALAYSIA’s economy expanded more strongly than expected in the second quarter of 2026 (2Q2026), with advance estimates showing gross domestic product (GDP) growth of 5.8% year on year (y-o-y), beating the 5.2% consensus forecast and accelerating from 5.4% in the first quarter.

This brings growth for the first half of 2026 to 5.6%.

The surprise came largely from export-oriented industries and a rebound in the mining and quarrying sector, underscoring the continued strength of external demand despite an increasingly uncertain global backdrop.

The manufacturing sector grew 7.5% y-o-y in the second quarter, up from 5.9% in the first three months of the year, driven by exports of electrical and electronic (E&E) products as well as petroleum, chemicals, rubber and plastic products, according to the Department of Statistics Malaysia.

Mining and quarrying also staged a sharp recovery, expanding 10.2% y-o-y after contracting 2.1% in the first quarter, buoyed by stronger natural gas production.

Elsewhere, however, growth lost some momentum. Services expanded 5.4%, easing from 5.6% in the previous quarter, while construction slowed to 6.6% from 7.7%. Agriculture slipped into contraction, shrinking 3.7% after growing 2.7% in the first quarter.

UOB Global Economics and Market Research senior economist Julia Goh says the latest figures point to an economy that remains resilient but uneven.

“Sectoral performance in the second quarter continued to reflect uneven growth dynamics, with easing momentum in the services and construction sectors. There are clear signs of softer domestic demand amid elevated cost pressures,” she says in a report last Friday.

The stronger-than-expected data has prompted economists to reassess their outlook for the year.

Goh says UOB is likely to raise its full-year growth forecast after the release of the official 2Q GDP figures on Aug 14.

“We may need to tweak our full-year growth estimates higher based on first-half performance,” she adds.

RHB Bank has already upgraded its 2026 GDP forecast to 5.4% from 4.7%, while OCBC Research has lifted its projection to 5.2% from 4.4%, citing the strength of E&E exports and resilient domestic demand.

Both forecasts are above Bank Negara Malaysia’s official growth range of 4% to 5% for 2026.

BIMB Securities Research also expects the economy to expand by more than 5% this year, supported by firm external demand, robust investment activity and resilient consumer spending.

Despite the upbeat first-half performance, economists broadly expect growth to moderate in the second half of the year.

RHB Bank group chief economist Barnabas Gan expects GDP growth to ease to between 5% and 5.2%.

“We are expecting growth to undergo a healthy normalisation in the second half. I’d like to emphasise that it is a normalisation, not a slowdown,” he tells The Edge.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-economic Research Centre (SERC), expects a sharper moderation, forecasting growth of between 4% and 4.5% in the second half (2H).

Even so, he believes full-year growth is likely to finish near the upper end of the central bank’s forecast range.

Lee points to three factors behind the expected moderation.

The first is the external factors surrounding the war in the Middle East, which continue to be a risk to growth.

The second is a high base effect from 2H2025’s growth. Malaysia’s GDP expanded 6.2% in 3Q2025 and 5.4% in 4Q2025, resulting in 2H2025 growth of 5.7%.

The third centres on exports, particularly from the E&E sector.

“Many have ramped up production because of the artificial intelligence (AI) boom. The question is whether there will be a build-up in inventory because of the higher production in 2H,” says Lee.

So far, demand linked to artificial intelligence has continued to power Malaysia’s export sector.

OCBC Research notes that E&E exports surged 70.5% y-o-y in May, accelerating from 46.6% in April and well above the 26.7% recorded in 1Q2026.

“The World Semiconductor Trade Statistics (WSTS) expects semiconductor growth of 89.9% y-o-y in 2026, followed by resilient growth of 26.6% in 2027. This suggests that tailwinds for E&E exports may persist longer than initially expected,” the research firm says.

The resilience in exports should provide an important cushion for the economy even as household consumption becomes more mixed, it adds.

Goh says the better-than-anticipated performance suggests that economic activity has remained resilient despite a challenging external environment, supported by ongoing supply chain diversification in selected export-oriented sectors and improvements in manufacturing output.

“This provides a stronger starting point, entering 2H2026 even as downside risks from external uncertainties remain,” she adds.

But risks remain.

Goh expects the economic effects of the Middle East conflict to become more evident from 3Q2026 as inventory drawdowns are near completion and favourable base effects begin to fade.

“Moreover, the recent re-escalation of tensions in the Middle East, including threats to key global shipping routes such as the Red Sea alongside existing risks surrounding the Strait of Hormuz, continues to cloud the external outlook,” she says.

Despite the normalisation that is expected to take place in 2H2026, many economists are optimistic that Malaysia’s GDP growth could once again outperform the official forecast. Should growth exceed 5% this year, it would mark the third consecutive year that the economy has achieved that milestone. 

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