Malaysia’s economy delivered a stronger-than-expected start to 2026, expanding 5.3% in the first quarter, but economists are increasingly cautious that external shocks could temper momentum in the months ahead.
The latest performance, while slower than the 6.3% recorded in the previous quarter, still reflects broad-based strength anchored by domestic consumption and export-led manufacturing, particularly the electrical and electronics (E&E) segment.
Domestic Demand Remains Key Growth Anchor
Monash University Malaysia senior lecturer Dr Andrew Woon said the first quarter (1Q) outcome underscored “resilience amid global geopolitical tensions, elevated oil prices and external headwinds”, with services and household spending forming the backbone of growth.
“Domestic demand was the key driver, with the services sector expanding 5.4% during the festive periods, while retail and wholesale trade were lifted by strong spending and government cash assistance,” he told BusinessToday.
Woon noted that manufacturing also surprised on the upside, growing 5.8% on the back of sustained global demand for technology products amid the ongoing artificial intelligence (AI) and semiconductor cycle.
He added that while mining and construction saw expected softness due to oil and gas disruptions, the broader data showed no major downside surprises, with markets instead reacting to expectations of continued fiscal support.
Echoing the view that Malaysia’s 1Q expansion was “robust and above potential growth of around 4.5%”, Sunway University economics professor Dr Yeah Kim Leng said it was driven by the two dominant sectors of services and manufacturing.
“Services grew 5.4%, supported by private consumption, which accounts for about 60% of GDP, while manufacturing nearly doubled its three-year average growth at 5.8%,” he shared with BusinessToday.
However, he highlighted weakness in the smaller sectors, particularly agriculture and oil and gas mining, which contracted 1.1% during the quarter.
Momentum Carried From Late 2025 Investment Cycle
Economist Geoffrey Williams, meanwhile, said the strong 1Q performance was largely a continuation of momentum built in late 2025, with approved investments from previous years beginning to materialise.
“The 1Q growth came before the start of the Middle East conflict, and was driven by trade and investment,” he told BusinessToday.
Looking ahead, however, all three economists expect a moderation in 2Q growth as global uncertainties intensify.
2Q Outlook Turns Cautious Amid External Risks
Dr Woon warned that geopolitical tensions, especially in the Middle East, could weigh on supply chains, consumer confidence and spending power, while also increasing fiscal pressure through subsidy and living cost support measures.
Despite this, he said the E&E sector remains a key buffer, supported by global demand for AI-related technologies and semiconductors.
“To sustain momentum, services-led initiatives such as tourism under Visit Malaysia 2026 will be important in supporting spillovers to SMEs and domestic consumption,” he added.
Williams, meanwhile, projected the growth for 2Q to ease to between 4.5% and 5%, describing it as still “good performance”, but reflective of a softer global environment and slowing second-half momentum.
He added that policy is likely to remain steady in the near term, with interest rates expected to be held and greater focus placed on subsidy rationalisation to manage fiscal pressures.
External Demand To Be Key Swing Factor For 2026
Dr Yeah also maintained that while no major policy shifts are expected immediately, external risks remain the key watchpoint, particularly geopolitical developments and global demand for technology exports.
Overall, economists agree that Malaysia’s domestic economy remains stable, but its export-oriented structure, accounting for more than 70% of GDP, leaves it highly exposed to global trade cycles and external shocks heading into the second quarter.
