Economy holds up as risks build

MALAYSIA’S gross domestic product (GDP) growth registered at 5.4% for the first quarter of 2026 (1Q26).

Economists had projected growth of 5.3% ahead of the announcement, while GDP growth for 4Q25 stood at 6.2%.

Statistics Department chief statistician Datuk Seri Dr Mohd Uzir Mahidin says the stronger-than-expected results were due to continued domestic spending, stable investment activity and sustained export growth.

He adds that, on the expenditure side, the continued expansion in domestic demand was mainly driven by the private sector.

“Private final consumption expenditure, which accounted for 61.6% of Malaysia’s GDP, grew to 4.7%, supported by persistent tourism-related activities, positive labour market conditions, and continued policy support,” he told reporters during Bank Negara Malaysia’s (BNM) 1Q26 results announcement yesterday.

BNM governor Datuk Seri Abdul Rasheed Ghaffour says Malaysia’s economic fundamentals remain strong and are expected to stay resilient.

“Unemployment is also at the lowest level in years, and investment activity is still very strong. More importantly, the government has measures in place to mitigate the impact, and reforms we’ve undertaken over the years have provided buffers that place us in a relatively better position,” he says.

Over the past few weeks, the sentiment that Malaysia has entered into this period of global economic and geopolitical uncertainty from a position of strength has become increasingly widespread.

Talk of fund inflows and Malaysia emerging as a regional heavyweight also featured prominently in headlines this week.

The question is how long this momentum can be sustained, and whether markets are underestimating the real impact of the Middle East crisis.

Tradeview Capital Sdn Bhd portfolio manager Ng Tzyy Loon says the latest growth figures were a little surprising, given the macro headwinds since the outbreak of the Middle East conflict.

He reckons the growth drivers are nonetheless understandable, as many had expected the services and manufacturing sectors, as well as the electrical and electronics segment, to do the heavy lifting, underpinned by strong artificial intelligence-related demand.

Looking ahead, he expects some softening in the coming quarters as construction activity slows.

“This, coupled with weaker export numbers due to slower and longer shipping routes, will bring pressure on GDP growth in 2Q26. Also, private investment sentiment may turn more cautious as the conflict drags on,” he tells StarBiz 7.

He adds that growth is likely to normalise in the 4% to 5% range, as the lagged effects of higher oil prices begin to filter through.

Interestingly, Ng says while the market is aware of the immediate impact of the Middle East crisis – including higher transportation costs and ongoing discussions around fuel subsidy rationalisation for higher-income groups – concerns differ in scope.

“We think the market has lesser concerns about the second-and third-order effects, as we are more focused on supply issues for food and daily goods, like fertiliser, given the overhang issues in the opening of the Strait of Hormuz,” Ng opines.

On the other hand, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid says GDP growth above 5% generally signals a decent growth trajectory.

He says this reflects broad-based mobilisation of economic factors of production.

“Given the low base factor in the first half of financial year 2025 (1H25), which saw GDP growth at 4.4%, it is likely 2Q26 growth could come in at around, or slightly more than, 5%,” he tells StarBiz 7.

However, he cautions that 2H26 could be a critical period.

“We have seen the producer price index go up 4.1% month-on-month in April, the highest since the new data series began in 2015. Hence, businesses might want to pass on the additional cost to end consumers at some point this year,” he says.

Concurrently, consumers might look at altering their consumption trends, while being more judicious in what they spend on.

“Consumers will want to focus more on meeting basic needs and buying essential items, particularly if the price of global crude Brent oil remains elevated this year,” Mohd Afzanizam opines.

He reckons GDP growth momentum in 2H26 could moderate, partly due to a high base effect from 2H25, which would weigh on year-on-year comparisons.

“This would be challenging, especially if higher costs of living and doing business will change the growth trajectory.

“Hence, we are maintaining our GDP growth forecast of 4.6% for 2026, lower than 2025’s 5.2%, in light of economic shocks arising from the war in Iran.”

On a separate note, BNM’s Abdul Rasheed agrees that headline inflation is projected to edge higher this year, between 1.5% and 2.5%. For the quarter, inflation rose to 1.6%.

He says this reflected some initial cost pass-through from higher global cost pressures.

Electricity tariffs and fuel prices, mainly RON97 and diesel, increased during the quarter, leading to slower declines in electricity and fuel inflation.

These were partly offset by lower core inflation, mainly driven by softer price increases in food away from home and rental inflation.

He adds that, as a small and open economy, Malaysia is inevitably exposed to both the direct and indirect effects of ongoing geopolitical tensions.

“Nevertheless, the Malaysian economy is expected to remain resilient in 2026, with growth expected to come in within the range of 4% to 5%, supported by steady domestic demand and continued expansion in our export performance.”