PETALING JAYA: Malaysia’s industrial growth is expected to moderate in the second half of 2026 (2H26) as the high base effect kicks in and earlier stockpiling and front-loading activities normalise, although robust electrical and electronics (E&E) demand should continue to support the sector.
Socio-Economic Research Centre executive director Lee Heng Guie said the industrial production index (IPI) is expected to grow at a moderate pace in 2H26 at between 4.5% and 5.5%, compared to 5.9% in 1H26.
Lee said this is due to the high base effect in 2H25, adjustment of stocks due to the ramping up of production and front-loading of exports during the initial energy shock and supply chain disruptions.
“The manufacturing sector still remains the prime mover in 2H26, underpinned by the E&E sector and also domestic market- oriented industries such as transport equipment, and construction-related building materials.
“Major headwinds for manufacturers in 2H26 are persistent elevated raw materials and operating costs that compressed profit margin, as well as escalating geopolitical conflict and tariff uncertainties,” he told StarBiz.
June’s IPI recorded a 6.5% year-on-year (y-o-y) growth, with second quarter (2Q26) IPI expanding 7.7% y-o-y compared with 4% y-o-y in 1Q26. For 1H26, IPI grew 5.9% y-o-y, compared with 2% y-o-y in 1H25.
The manufacturing sector continued to drive output growth, expanding 7.3% y-o-y in June (May 2026: 6.6%), followed by electricity, which grew 6.7% y-o-y compared with 4.8% y-o-y in the prior month.
Meanwhile, mining production grew 3.1% y-o-y, moderating significantly from 19.8% y-o-y in May 2026.
Within manufacturing, the E&E sector remained the key driver, expanding 13.6% y-o-y in June, although this was slower than the 16.2% y-o-y growth recorded in May. Transport equipment and other manufactures also rebounded strongly, growing 9.4% y-o-y compared with a 4.8% y-o-y contraction in May.
Lee said June’s IPI performed better than expected, despite the Middle East conflict-inflicted global energy shock.
“A stronger IPI in 2Q26 could raise the Statistics Department’s advanced estimate of 5.8% gross domestic product (GDP) growth for 2Q26 higher to approximately 6%, assuming better-than-expected growth in the services sector,” he said.
iFAST Capital research analyst Kevin Khaw Khai Sheng said the moderation in June’s IPI was normal and did not signal broad-based weakness in the manufacturing sector, with E&E demand and domestic spending expected to support industrial activity in 2H26. “As long as E&E and consumption-related activities remain healthy, they should support our view that IPI will continue on a positive trajectory.”
Khaw said, however, that growth could moderate in 2H26 due to the high base effect and the normalisation of inventory stockpiling, which had picked up earlier in the year amid geopolitical uncertainties.
He maintained his GDP forecast at 4.5% to 5% for 2026, saying the latest IPI reading did not warrant a change to his forecast.
Meanwhile, Sunway University economics professor Yeah Kim Leng said the rising IPI momentum seen in 1H26 – despite the global oil shocks arising from the US-Iran war since Feb 28 – suggests the industrial output expansion is expected to continue in 2H26.
He added that the stronger IPI performance in 1H26 (5.9% y-o-y uptick) is evident when compared to the five-year trend of 4.5% or 10-year trend of 4.3%. “This is especially so since the restricted shipping through Strait of Hormuz has begun to ease as the two warring countries are negotiating a permanent peace agreement, pointing to an increased likelihood of a more stable global energy market in 2H26.”
On the mining sector, Yeah said the output is characteristically volatile, but attempts to increase domestic oil production amid high world energy prices and rising domestic consumption will likely see an uptrend in mining IPI in 2H26.
“The rise in domestic-oriented industries in June indicates that domestic demand remains resilient, supported by a robust labour market with sustained employment growth and rising wages and moderating inflation, which together bolster household purchasing power,” he said.
Yeah added that the continuing expansion of the domestic-oriented sector suggests the economy will be able to achieve decent growth, and the double-digit growth of the export-oriented industries will provide a fillip to the country’s economic performance this year.
“The biggest risks to manufacturers in 2H26 are elevated energy and input costs, alongside persistent shortages of raw materials. Another persistent risk confronting manufacturers is logistics disruptions due to the prolonged West Asia crisis that has transformed cost problems to commercial losses for some,” he said.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said apart from the volatility arising from the skirmish in the Middle East, the protectionist trade policies by the US would also mean higher cost of doing businesses globally. “The sentiment among businesses and consumers remain guarded as the cost of doing business and cost of living remain elevated. As such, they may take longer to make spending and investment decisions.”
