Q3 2027 GDP to moderate, as consumer remains cautious

KUALA LUMPUR: Malaysia's economic growth is expected to moderate in the third quarter of 2026 as resilient exports and investment help offset cautious consumer spending amid rising costs, economists said.

The economy expanded six per cent year-on-year in the second quarter, following 5.4 per cent growth in the first quarter, bringing first-half growth to 5.7 per cent.

Exports rose 45.5 per cent year-on-year to RM191.1 billion in August, driven by a 66.5 per cent increase in electrical and electronics products amid strong demand for semiconductors and artificial intelligence-related equipment.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid expects gross domestic product (GDP) to expand 5.2 per cent in the July-September quarter.

Meanwhile, Universiti Kuala Lumpur Business School economic analyst Associate Professor Dr Aimi Zulhazmi Abdul Rashid forecasts growth of 5.0 per cent.

The projections point to slower growth from the six per cent recorded in the second quarter and 5.4 per cent in the first quarter, following stronger economic activity in the first half of the year.

Afzanizam said the economic landscape remained resilient during the quarter, particularly in terms of external demand, although higher living costs could make consumers and businesses more cautious in their spending.

He said the producer price index (PPI), which rose 10.7 per cent in August, could signal that businesses would gradually pass on higher input costs to consumers.

"Domestic demand is likely to remain resilient, although at the same time, remain fairly cautious," he said.

Afzanizam expects Malaysia's GDP growth to reach around 5.2 per cent for the full year 2026.

Aimi said the projected third-quarter growth of five per cent would remain at the upper end of the government's official full-year growth forecast of four to 4.5 per cent.

He identified strong demand for electrical and electronics (E&E) products, particularly those linked to artificial intelligence (AI), alongside domestic investment and private consumption as the main drivers supporting growth.

Aimi said investment in machinery and equipment, information and communications technology, and data centres would provide additional support to economic activity.

Private consumption, meanwhile, would continue to be supported by a stable labour market, wage growth and government cash assistance, although higher costs could temper spending.

He said the outlook remained exposed to external risks, including potential US tariffs on semiconductors and escalating tensions in the Middle East.

EXPORT GROWTH OUTPACES IMPORTS

Malaysia's trade performance continued to provide support to economic growth, with exports expanding faster than imports in the first eight months of 2026.

Exports increased 31.2 per cent year-on-year to RM1.356 trillion between January and August, while imports rose 22.4 per cent to RM1.158 trillion.

This resulted in a trade surplus of RM198.7 billion, up 127.6 per cent from a year earlier, according to the figures provided by Aimi.

However, he cautioned that strong export growth did not necessarily translate into an equivalent increase in domestic value-add, as manufacturers also relied on imported intermediate goods and components.

August imports of intermediate goods rose 50.5 per cent to RM90.7 billion, while capital goods imports increased 37.4 per cent to RM21.6 billion. Imports of consumption goods fell 1.6 per cent to RM9.3 billion.

The composition suggested that import demand was being driven largely by production and investment requirements rather than household consumption, Aimi said.

TRADE IMBALANCES WITH US AND CHINA

Aimi also highlighted Malaysia's contrasting trade positions with the United States and China, describing them as interconnected with the restructuring of global supply chains.

Malaysia recorded a trade surplus of RM101.5 billion with the US in 2025, while its trade deficit with China reached RM163.4 billion.

The deficit with China had widened to RM159.8 billion in the first eight months of 2026, based on the figures provided.

He said Malaysia had benefited from the China-plus-one strategy, as companies diversified manufacturing and sourcing away from China amid higher US tariffs.

However, Malaysian manufacturers continued to depend on intermediate components from China and other regional suppliers to produce goods for export, particularly in the E&E sector.

This meant that stronger exports to the US could coincide with higher imports from China, reflecting Malaysia's role in regional production networks.

Aimi said the challenge was to increase domestic value-added by encouraging local companies, particularly small and medium enterprises, to produce more raw materials and semi-finished products currently imported for manufacturing.

He added that greater domestic production capabilities and more diversified export markets and import sources would help Malaysia capture a larger share of the value generated by international trade.

"The policy challenge for 2027 is not to close the China deficit with protectionism, but to increase domestic value-added," he said.