- Healthy growth momentum to continue in 2H26 amid global technology sector upcycle
- Strong underlying fundamentals cement position of strength for sustainable growth
- Cautiously optimistic of 2026 growth prospects with 5.2% GDP growth
Resilience in the face of Middle East geopolitical tensions
Notwithstanding the challenging global environment stemming from a protracted energy supply shock in the Middle East, global economic growth trajectory has remained resilient thus far, largely boosted by the unprecedented global tech boom. Global equity indices have also been scaling record highs, thanks to strong corporate earnings despite rising sovereign bond yields. On the domestic front, Malaysia's 2Q26 economy exceeded expectations with an impressive 6% y-o-y growth (1H26 +5.7%), largely attributed to the sustained expansion in domestic trade has benefitted tremendously from global tech upcycle and oil-related shipments, contributing ~40% of the incremental growth in 2Q26.
Tailwinds from AI spending
We believe domestic demand remained supported by sustained household spending and further realisation of investment projects. Strong semiconductor demand and data-centre investment are increasingly feeding through to exports, manufacturing, construction and services in Malaysia. This has been corroborated by the explosive growth of Malaysia's total exports, surging by 31% for 8M26 - the fastest over the past 20 years, thanks to the impressive E&E export growth to come in at 108% and 29% respectively given the insatiable demand for AI infrastructure which will in turn continue to benefit Malaysia. Meanwhile, continued strength in approved investment (1H26 +12%) suggests that the investment cycle has further room to run, ensuring the growth pillar remains intact.
Budget 2027 expected to be people-centric
Budget 2027, to be unveiled on 9 Oct 2026, is likely to remain fiscally disciplined while becoming more targeted toward cost-of-living relief and growth-enhancing spending. The government explicitly emphasizes continued subsidy rationalization, better targeting of assistance, improved tax compliance and higher spending efficiency, rather than broad-based fiscal expansion. We can expect continuous incentives and facilitation to focus on semiconductors, AI and digital services, energy transition, logistics and aerospace, alongside measures to deepen local supply chains technology transfer and high-skilled employment. Overall, we believe the on-going fiscal consolidation will remain in place, but savings are increasingly being recycle toward targeted household protection and productivity-enhancing investment.
In a position of relative strength to normalise the OPR
We remain constructive on Malaysia's economic outlook with our 2026 GDP growth projection of 5.2%, which reflects a high base in 2H25 and considers near-term challenges from higher energy and commodity prices. Malaysia is better positioned than many of its Asian peers to weather the disruption given its status as a net energy exporter. We believe Malysia's strong fundamentals, anchored by firm domestic demand and a diversified export base, will continue to underpin the economy's resilience. With growth momentum remaining robust, we expect BNM to reverse its 2025 pre-emptive rate cut, raising the OPR by 25bps to 3.00% by 1H27. Key downside risks include a prolonged Middle East conflict, slowdown in key trading partners and higher cost of living.
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