PETALING JAYA: Malaysia remains on track to achieve its official economic growth target of 4% to 5% this year, although economists expect growth to moderate in the second half of this financial year (2H26) as repercussions from the Middle East conflict weigh on global trade and business confidence.
Economist Yeah Kim Leng said Malaysia has so far weathered the impact of the Middle East conflict better than many countries.
He said government fuel subsidies had helped shield consumers while financial assistance had enabled businesses, particularly small and medium enterprises, to absorb some of the cost pressures.
Against this backdrop, Yeah expects Malaysia’s second quarter of financial year 2026 (2Q26) gross domestic product (GDP) growth to come in at around 5%, broadly in line with the 5.4% expansion recorded in the first quarter.
“It will likely be around that 5%, or slightly above,” he told StarBiz.
Malaysia’s 2Q26 advance GDP figure is due for release tomorrow.
While government assistance has cushioned impact, Yeah said some industries reliant on refinery and petrochemical products have still seen lower output.
However, Yeah said Malaysia’s exposure to the global electrical and electronics (E&E) and artificial intelligence (AI) supply chain offset some of the weakness, providing support to exports.
The E&E sector accounted for nearly half of Malaysia’s exports in May, with shipments totalling RM91.57bil out of total exports of RM184bil.
The sector also accounted for RM62bil, or 43.2%, of total imports worth RM143.62bil.
Yeah also said recent industrial production data also supported his expectation that 2Q26 growth would remain resilient.
Malaysia’s Industrial Production Index (IPI) expanded 8.4% year-on-year in May after rising 8.2% in April, bringing growth for the first five months of the year to 5.7%.
Yeah said the stronger industrial output could partly reflect inventory rebuilding and restocking activities, which would provide some support to economic growth in the coming months.
“From the supply side, that will likely provide some lift into the second half’s output,” he said.
On domestic demand, Yeah said private consumption remained a key pillar of growth despite some moderation.
He said household spending, which accounts for about 60% of GDP, continued to be supported by moderate inflation, stable employment conditions and continued credit growth.
“The important thing is private consumption has not really been impacted by inflation. Inflation remains very moderate,” he said.
“We do not expect any sharp fall in the second quarter. In fact, consumption will continue to provide support in sustaining GDP growth.”
Malaysia’s consumer price index rose 2% year-on-year in May, while unemployment remained stable at 3%.
However, Yeah expects the impact of the Middle East conflict to become more pronounced in 2H26 if tensions persist and disrupt global trade flows.
Concerns over the global spillover effects have also prompted Standard Chartered to lower its global growth forecast for the year to 3% from 3.4%.
Its global head of research and chief strategist Eric Robertsen said the downgrade was largely an “accounting decision” reflecting the sharp slowdown in Middle East economic activity during the second quarter.
“The revision largely reflects the significant downshifting growth in the Middle East in the second quarter,” he said during the bank’s global and Asean outlook briefing yesterday.
“There were other spillover implications from that second quarter, shall we say, economic cardiac arrest. But the reality is that the downgrade to our global growth forecast is largely a reflection of what has already happened.”
Looking ahead, Robertsen said the outlook for 2H26 would depend on whether the key drivers that supported 1H26 global growth could continue, particularly strong technology capital expenditure, investment and AI-related exports.
However, he cautioned that the concentration of growth in AI-related sectors was a potential vulnerability.
“A very large percentage of the total amount of economic growth that we have just seen comes from a very narrow part of the economy, and it does mean there are other parts of the economy that are underperforming,” he said.
Standard Chartered chief economist and head of foreign exchange for Asean and South Asia Edward Lee said the scale of AI’s contribution to growth could be seen in US economic data, noting that about 1.35 percentage points of the country’s 1.6% first-quarter GDP growth came from AI-related investment.
“US imports from the rest of the world have actually contracted. But if you exclude HS code 847150, which is server equipment, the contraction is actually quite deep,” he said.
“Again, there is a huge amount of AI fuelling our global economy.”
Lee said this trend was also visible in Malaysia, where data centre investments have lifted services exports to around 1.7% to 1.8% of GDP, compared with less than 1% at the end of 2023.
Beyond AI, Robertson said the other key concern was the longer-term economic impact from the Middle East conflict, particularly through supply chain disruptions and energy markets.
He said while some shipments through the Strait of Hormuz had resumed, global trade flows is “nowhere close to normalising”
“Whether it’s shipping volumes or tonnage, it doesn’t matter how you look at it, we have not normalised.”
Despite the more challenging global backdrop, Yeah said Malaysia’s growth target remains achievable, although momentum is expected to slow in the second half of the year.
“Although second half growth may moderate to below 5%, the overall official forecast of 4% to 5% is still within reach,” he said.
Yeah said this would be subject to the conflict not escalating into a broader disruption to global energy supplies.
“As long as there is no total collapse, Malaysia can still ramp up supply from other countries. We can remain more resilient than many other countries,” he said.
Meanwhile, Standard Chartered’s Lee said the bank expects Malaysia’s economy to grow around 4.5% this year, with upside risks, supported by continued investment activity and resilient domestic conditions.
On the currency front, Standard Chartered expects the US dollar to strengthen in the second half of the year, with the greenback forecast to gain about 2% to 3% on average by year-end.
Despite the stronger dollar environment, the bank expects the ringgit and Singapore dollar to remain among the better-performing Asean currencies.
Lee said Malaysia’s improving external position, particularly its services balance, had provided additional support for the ringgit.
“One point that people still miss today is actually the services balance for Malaysia. Over the last three quarters, it’s a surplus after being in deficit for almost 14 years,” he said.
He attributed the improvement partly to tourism recovery and the growth of data centre-related activity.