Malaysia’s economy expanded faster than expected in the second quarter of 2026 (2Q26), with real gross domestic product (GDP) growing 6.0% year-on-year (YoY), says HLIB on its assessment of Bank Negara’s GDP statement released last friday.
The growth exceeded HLIB’s forecast of 5.9%, as well as the Department of Statistics Malaysia’s (DOSM) advance estimate and consensus median forecast of 5.8%.
The stronger performance lifted Malaysia’s first-half 2026 (1H26) GDP growth to 5.7%, compared with 5.4% in the first quarter.
On a seasonally adjusted quarterly basis, the economy rebounded 2.5% in 2Q26, reversing the marginal 0.03% contraction recorded in 1Q26.
Following the stronger-than-expected performance, HLIB raised its full-year 2026 GDP growth forecast to 5.3% from 4.7%, placing its projection above Bank Negara Malaysia’s (BNM) official growth target of 4% to 5%.
HLIB said private consumption remained a key growth engine, expanding 4.8% YoY in 2Q26, slightly higher than the 4.7% recorded in the preceding quarter.
Continued fiscal support helped cushion households from higher fuel costs, although growth moderated across several spending categories.
Transport expenditure grew 7.1%, while furnishings, household equipment and maintenance rose 3.8%. Food and beverages increased 3.6%, while communication spending expanded 3.5%.
Discretionary spending also remained resilient, with recreation services and culture growing 5.2%, while restaurants and hotels rose 10.9%, although both moderated from the previous quarter.
Public consumption provided an additional boost, accelerating to 7.6% from 4.1% in 1Q26, supported by higher spending on supplies and services.
However, investment growth moderated, with gross fixed capital formation expanding 4.6% compared with 7.3% previously. Private investment slowed to 4.3% from 7.8%, while public investment improved to 6.3% from 5.3%.
Exports provide stronger growth support
External trade emerged as a more significant contributor to economic growth during the quarter.
Exports surged 17.0% YoY, compared with 5.2% in 1Q26, driven by robust demand for electrical and electronics (E&E) products. E&E exports jumped 57.4%, more than doubling the 26.7% growth recorded in the previous quarter.
Imports also increased sharply by 13.9%, compared with 4.6% previously, led by intermediate and consumption goods.
As exports outpaced imports, net exports contributed 2.4 percentage points to headline GDP growth, up significantly from 0.6 percentage points in 1Q26.
Manufacturing, mining underpin supply-side growth
On the supply side, manufacturing growth accelerated to 7.3% from 5.9% in 1Q26.
HLIB said the improvement was driven primarily by the E&E cluster, where electrical, electronic and optical products grew 14.4%. The petrochemical segment also returned to growth, expanding 3.2% compared with a 1.3% contraction previously.
Motor vehicle and transport equipment production rebounded 4.3%, while wood, furniture, paper products and printing, as well as non-metallic mineral and metal products, also recorded stronger growth.
The mining sector registered a sharp turnaround, expanding 9.2% after contracting 2.1% in 1Q26. The recovery was largely driven by natural gas production, which surged 19.3%, although crude oil output remained weak, declining 3.6%.
Services growth edged up to 5.9% from 5.6%, supported by transportation and storage, finance, insurance, real estate and business services, as well as information and communication.
The information and communication segment grew 8.3%, supported by data centre operationalisation.
Construction growth, meanwhile, moderated to 6.5% from 7.7%, reflecting a high base, although residential buildings and civil engineering recorded firmer growth.
Agriculture was the main drag on the economy, contracting 3.7% after growing 2.6% in 1Q26. The decline was largely attributed to weaker oil palm, forestry and logging, marine fishing, aquaculture and rubber production.
Current account surplus narrows
Despite the stronger economic growth, Malaysia’s current account surplus narrowed to RM10.8 billion, equivalent to 2.0% of gross national income (GNI), from RM15.2 billion or 3.0% of GNI in 1Q26.
HLIB said the services account swung into a RM0.7 billion deficit from a RM6.4 billion surplus previously, reflecting wider deficits in other business services, transport and insurance and pension services.
This was partly offset by a larger goods surplus, which rose to RM40.7 billion from RM33.6 billion.
The primary income deficit widened to RM27.2 billion from RM20.9 billion, while the secondary income deficit narrowed to RM2.1 billion from RM4.0 billion.
Growth expected to moderate in 2H26
Looking ahead, HLIB said the Malaysian economy had demonstrated resilience despite external shocks stemming from the US-Iran conflict.
It expects export activity and sustained domestic demand to continue supporting growth, although economic momentum is likely to moderate in the second half of 2026 due to the stronger base recorded in 2H25.
HLIB highlighted potential energy supply disruptions arising from the ongoing West Asia conflict as a key downside risk, alongside persistent US protectionist policies.
The research house also pointed to concerns following the White House’s classification of Malaysia as a Tier 2 country associated with illegal Chinese transshipment risks.
On monetary policy, HLIB maintained its expectation that Bank Negara Malaysia will keep the overnight policy rate (OPR) unchanged at 2.75% throughout the second half of 2026, as resilient domestic growth and evolving external risks provide little impetus for further rate adjustments.
