The nation’s industrial production remained on a firm footing in the second quarter of 2026, despite a moderation in June, with manufacturing activity providing the main support amid resilient export and domestic demand.
Kenanga Research said the Industrial Production Index (IPI) grew 6.5% year-on-year (y-o-y) in June 2026, slower than the 8.5% expansion recorded in May and slightly below its 6.9% forecast and the market consensus of 7.2%.
On a month-on-month (m-o-m) basis, however, the IPI accelerated 5.5% in June from 1.4% in May, broadly in line with its long-run average.
For the second quarter of 2026, IPI growth accelerated to 7.7% from 4.0% in the first quarter, marking its strongest quarterly expansion in 15 quarters.
Manufacturing remained the key driver, with output expanding 7.3% y-o-y in June, faster than the 6.6% growth in May. The improvement was supported by a strong rebound in transport equipment and other manufacturers, which grew 9.4% compared with a 4.8% contraction previously, while beverages and tobacco production returned to growth of 1.8% from a 0.3% decline.
Growth was partly capped by slower expansion in the electrical and electronics (E&E) segment, where output growth moderated to 13.6% from 16.2% in May.
Manufacturing growth accelerated to 7.4% in 2Q26 from 5.7% in 1Q26, its fastest pace since the third quarter of 2022.
Within manufacturing, export-oriented industries expanded 7.6% y-o-y in June, although this represented a three-month low. Growth in the manufacture of computer, electronics and optical products moderated to 14.9% from 19.3%, while coke and refined petroleum products slowed to 2.9% from 7.8%.
Domestic-oriented industries, meanwhile, recorded a stronger recovery, expanding 6.4% in June compared with 2.0% in May. The improvement was driven by a sharp rebound in motor vehicles, trailers and semi-trailers, which grew 12.6% after contracting 10.3% in May.
Basic metals also maintained strong growth at 8.2%, compared with 7.3% previously.
On a m-o-m basis, manufacturing output surged 7.6% in June, up from 2.1% in May, although the pace remained below its long-run average of 8.1%.
The mining sector recorded a sharp moderation in June, with output growth slowing to 3.1% from 19.8% in May. Despite this, mining output rebounded 9.4% in 2Q26, compared with a 2.9% contraction in 1Q26.
Kenanga attributed the quarterly recovery partly to higher domestic production amid the US-Iran conflict.
Natural gas output grew 14.8% y-o-y in June, easing from 37.4% in May, while crude petroleum production returned to marginal growth of 0.6% after declining 0.7% in the previous month.
The electricity index also strengthened, rising 6.7% y-o-y in June from 4.8% in May. This brought quarterly electricity output growth to 7.3% in 2Q26, its strongest pace in nine quarters.
For the first half of 2026, Malaysia’s IPI expanded 5.9%, significantly faster than the 2.0% growth recorded in the corresponding period of 2025. Manufacturing output increased 6.5%, while mining and electricity grew 2.9% and 6.3%, respectively.
Kenanga maintained its 2026 manufacturing IPI growth forecast at 5.0%, compared with 4.5% in 2025, expecting production growth to moderate in the second half.
The research house said manufacturing momentum remained firm despite heightened global uncertainty, with export-oriented industries continuing to benefit from resilient E&E demand and higher global energy prices.
The July Manufacturing Purchasing Managers’ Index remained at 50.7, unchanged from June, indicating that manufacturing activity continued to expand, although Kenanga remained cautiously optimistic as output is expected to normalise from its recent peak.
Kenanga also raised its second-quarter 2026 gross domestic product (GDP) growth forecast slightly to 5.9% from 5.7%, following the stronger-than-expected industrial production performance. This compares with 5.4% GDP growth in the first quarter.
The research house said manufacturing growth had so far outperformed its initial expectations, supported by frontloading and stockpiling activity amid concerns over the Middle East conflict.
Services activity also remained resilient, supported by domestic demand.
“If this momentum holds through 2H26, full-year 2026 GDP growth could exceed our current 4.5%-5.0% forecast range,” Kenanga said.
