PETALING JAYA: Despite external headwinds, economists are positive on Malaysia’s industrial production growth in 2026, underpinned by strong domestic demand and the global technology sector upcycle.
Although there could be a slight moderation in industrial production growth this year, they anticipate overall growth to remain at a healthy level, projected at between 3% and 3.5% in 2026 amid US tariffs and geopolitical tensions.
OCBC senior Asean economist Lavanya Venkateswaran told StarBiz she expects slower industrial production growth of 3% year-on-year (y-o-y) in 2026 from an estimated 3.7% in 2025.
She said this would be led by slower growth in the manufacturing sector, although electricity and mining output would remain resilient.
While tailwinds from digitalisation, artificial intelligence (AI), automation and data centre investments remain strong in Malaysia, she expects some moderation in production in these sectors, assuming modestly slower external demand.
“However, the continued technology sector upcycle and diversification of export markets, allowing for greater product diversification, are some of the positive catalysts we see for 2026,” Lavanya added.
She said slower-than-projected external demand, geopolitical shocks and punitive US semiconductor tariffs are some of the key downside risks to Malaysia’s industrial production growth in 2026.
HSBC Asean economist Yun Liu also expects a moderation in Malaysia’s industrial production in 2026, as front-loading of trade fades and a pullback in trade sets in.
That said, she noted the electrical and electronics (E&E) sector should be able to provide a floor for decent industrial production growth, as the AI-driven technology cycle continues.
“At the same time, subdued commodity dynamics are headwinds for Malaysia’s commodity-related production.
“Overall, we expect Malaysia’s gross domestic product (GDP) growth to slow from 4.9% in 2025 to 4.5% in 2026.
“While a slowdown may be inevitable, Malaysia’s significance in technology and resilience in domestic demand should ensure a healthy moderation in overall economic growth,” she said.
Based on official estimates, the economy is forecast to grow between 4% and 4.5% in 2026, compared with 4% to 4.8% in 2025.
In the third quarter of 2025 (3Q25), growth as measured by real GDP expanded by 5.2%, while the economy grew by an average of 4.7% in the first nine months of 2025.
Data from the Statistics Department showed advance GDP rose 5.7% y-o-y in 4Q25, up from 5.2% in the previous quarter, marking the fastest quarterly expansion since 4Q22.
According to the advance estimates, the broad-based expansion reflected strong performance in services and manufacturing, while mining lagged due to production constraints and maintenance disruptions.
Final 4Q25 and full-year GDP data are expected on Feb 13.
Taking a cautiously bullish stance, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said Malaysia’s purchasing managers’ index (PMI) improved to 50.2 points in January and has hovered around the 50-point mark since November last year.
What it means is that sentiment among manufacturers has improved and the stronger ringgit has helped to reduce import costs, ultimately improving profitability.
The manufacturing PMI gauges prevailing economic trends in the sector. A reading above 50 signals expansion, while a reading below 50 indicates contraction.
“However, it remains to be seen whether US tariffs will fully impact US demand, given that the country is our main trading partner. Despite this, the outlook for the technology sector remains positive.
“The World Semiconductor Trade Statistics projects global semiconductor sales growth of 26.3% in 2026, following an estimated 22.5% expansion last year.
“Integrated circuits are expected to lead growth in 2026, which is significant for Malaysia as they are among the country’s key semiconductor exports.
“Hence, we are pencilling in industrial production growth of between 3% and 3.5% for 2026,” he noted.
On whether the slight moderation in the economic growth projection to between 4% and 4.5% for this year may affect industrial production growth in 2026, Mohd Afzanizam said it could.
He said external demand would be the key risk factor to watch, as it would have immediate impact on export-oriented industries.
Malaysia’s latest industrial production index (IPI) reading in November 2025 suggests resilience in industrial activity, despite coming in slightly below consensus expectations.
The IPI remained in expansionary territory in November, rising 4.3% y-o-y, compared with a 6% expansion in October.
The slowdown was primarily driven by softer manufacturing output growth, which eased to 4.9% y-o-y, alongside a notable deceleration in mining sector activity to 2.3% y-o-y (October: 5.8%).
Manufacturing, which accounts for 65.9% of the IPI, remained the main driver, while electricity generation provided a partial offset, strengthening to 2.7% y-o-y.
On a month-on-month (m-o-m) basis, overall industrial activity turned negative, with the IPI contracting by 1.1% after a 2.1% expansion in October.
This points to near-term production normalisation following earlier gains.
Meanwhile, BIMB Research noted that industrial production across Asia showed mixed performance in November, reflecting uneven external demand conditions.
Singapore and Taiwan posted strong expansions of 14.3% and 16.4%, respectively, while growth was more moderate in China (4.8%) and Vietnam (10.8%).
Industrial activity contracted in South Korea (minus 1.4%), Japan (minus 2.1%) and Thailand (minus 4.2%), underscoring divergence in regional manufacturing cycles amid a challenging global environment.
Furthermore, the research house said Malaysia’s industrial sector is expected to sustain its recovery, underpinned by firm domestic demand, resilient E&E exports and gradually easing external pressures, despite lingering uncertainty surrounding potential US semiconductor tariffs.
The brokerage maintained its IPI growth forecast at 3.7% for 2025, while noting that base effects and production normalisation could lead to more moderate growth in 2026.
While prospective US tariff measures pose risks to external demand, it said Malaysia’s industrial sector remains well supported by resilient domestic-oriented industries, steady consumer spending and a robust investment pipeline.
This is driven by continued diversification across products and export markets, strong domestic demand, supportive policies and deeper regional integration, which are expected to help the sector weather external challenges and sustain momentum in manufacturing and trade.
The manufacturing sector is one of the largest contributors to Malaysia’s economy, typically ranking second after services, and accounts for about 22% to 24% of GDP.
