OCBC has raised its 2026 GDP growth forecast for Malaysia to 5.2%, up from 4.4%, following stronger-than-expected economic performance in the second quarter, driven by robust electronics exports and resilient domestic demand.
The upward revision came after Malaysia’s advance gross domestic product (GDP) estimates showed the economy expanding 5.8% year-on-year in the second quarter of 2026, up from 5.4% in the first quarter. The figure exceeded the market consensus of 5.2% and was broadly in line with OCBC’s own projection of 6.0%.
Malaysia’s economy expanded by 5.6% in the first half of 2026, suggesting that while growth is expected to moderate slightly in the second half, the overall outlook remains stronger than previously anticipated.
According to OCBC Senior ASEAN Economist Lavanya Venkateswaran, manufacturing remained the primary growth engine, accelerating to 7.5% from 5.9% in the previous quarter, while the mining sector staged a sharp turnaround with 10.2% growth after contracting 2.1% in the first quarter.
The services sector maintained solid momentum with 5.4% growth, while construction expanded 6.6%, supported by continued infrastructure activity. Agriculture was the only sector to contract, declining 3.7% amid weaker crude palm oil production.
Electronics exports remain key growth driver
OCBC said Malaysia’s export sector, particularly electrical and electronics (E&E), has significantly outperformed expectations.
E&E exports surged 70.5% year-on-year in May, compared with 46.6% in April and 26.7% in the first quarter, reflecting sustained global demand for semiconductors.
The research house noted that the World Semiconductor Trade Statistics (WSTS) projects global semiconductor sales to grow 89.9% in 2026, followed by another 26.6% expansion in 2027, suggesting favourable conditions for Malaysia’s export-oriented electronics industry could persist longer than initially expected.
Beyond exports, OCBC said domestic demand continues to provide a solid foundation for growth, supported by ongoing government infrastructure projects, private investments in data centres, a resilient labour market and healthy wage growth.
Private sector credit growth also strengthened, rising to 6.0% year-on-year in May from 5.0% in January, indicating continued business and consumer confidence.
Inflation remains subdued despite stronger economy
Despite stronger economic activity, inflationary pressures remain contained.
Headline inflation eased to 1.9% in June from 2.0% in May, while core inflation also moderated to 1.9%, providing policymakers with greater flexibility.
The moderation was largely driven by lower transport inflation, even before the implementation of the government’s BudiDiesel subsidy mechanism on July 1.
OCBC said the benign inflation environment supports its expectation that Bank Negara Malaysia (BNM) will keep its Overnight Policy Rate unchanged at 2.75% for the remainder of 2026 before normalising it to 3.00% in early 2027, potentially as soon as January.
Fiscal risks remain linked to oil prices
While maintaining a positive growth outlook, OCBC cautioned that fiscal risks remain elevated due to higher-than-expected fuel subsidy costs.
The research house estimates Malaysia’s petroleum subsidy bill could reach around RM40 billion in 2026, significantly above the government’s original budget estimate of RM15 billion, potentially widening the fiscal deficit by about 0.2 percentage points of GDP beyond the official target of 3.5%.
OCBC added that if Brent crude oil prices remain above US$85 per barrel for a prolonged period, the government’s fiscal position could come under further pressure.
Nevertheless, the bank believes Malaysia’s strong export performance, resilient domestic economy and improving industrial activity should continue to support healthy economic growth heading into 2027.
