Malaysia’s economic growth to moderate to 4.6% in 2026

Malaysia’s economic growth is expected to moderate to 4.6% in 2026 from an estimated 4.9% in 2025, even as the ringgit emerged as the strongest-performing regional currency last year, according to the Asean+3 Macroeconomic Research Office (Amro).

The economic surveillance unit said Malaysia remains one of the better-performing economies in the region, supported by resilient domestic demand and continued strength in the global technology upcycle, particularly in electrical and electronics (E&E) exports and artificial intelligence-related (AI-related) investments.

Lead economist and mission chief for Malaysia Kian Heng Peh said the economy has delivered a solid performance despite rising global trade protectionism and geopolitical tensions.

"Growth is expected to remain firm in 2026, with a moderating slant to 4.6% from the estimated 4.9% in 2025 amid persistent external headwinds,” he said during a press briefing following Amro’s annual consultation visit to Malaysia.

Domestic demand, especially private consumption, has been a key pillar of support. A stable political environment and clearer policy direction have also helped sustain investor confidence, alongside ongoing fiscal reforms.

Inflation is projected to average 2% in 2026, reflecting contained cost pressures and limited pass-through from subsidy rationalisation and the expansion of the Sales and Service Tax (SST).

Following a pre-emptive 25 basis point rate cut in July 2025, Bank Negara Malaysia maintained its policy rate for the rest of the year. Amro said the benign inflation outlook supports the current monetary stance.

The external sector remains firm. Malaysia’s current account surplus rose to 2% of gross domestic product in the first three quarters of 2025, up from 1.4% in 2024, underpinned by strong E&E exports, a recovery in tourism receipts and sustained foreign direct investment (FDI) inflows.

Meanwhile, the ringgit appreciated 10.1% against the US dollar in 2025, the strongest gain among regional currencies.

Amrochief economist Dong He attributed the currency’s performance to policy credibility and tangible progress in fiscal reform. “The strong performance of the ringgit reflects the progress of fiscal reforms that Malaysia has implemented, as well as policy clarity and credibility.”

He noted that Malaysia has attracted sustained capital inflows, reflecting investor confidence in macroeconomic management and reform momentum.

Addressing concerns that a stronger ringgit could erode export competitiveness, Dong said Malaysia’s manufacturing structure mitigates part of the impact.

“Malaysia’s exports are diversified across markets and products, particularly in E&E and petrochemicals. Much of the manufacturing involves imported intermediate goods, so a stronger ringgit reduces import costs and partially offsets export price pressures,” he explained.

Looking ahead, Amro cautioned that risks remain tilted to the downside. Renewed trade frictions, higher tariffs and tighter technology controls could disrupt export-oriented manufacturing and delay multinational investment decisions.

Malaysia’s deep integration into global supply chains, especially in semiconductors, makes it exposed to shifts in US-China technology policies. While certain semiconductor products are currently exempt from additional tariffs, any change in policy could pose risks to growth.

Dong said the current global tech upcycle could persist for “another year or two”, supported by structural demand for semiconductors, AI applications and data centre capacity across the region.

However, he warned against complacency during boom periods.

“In boom times, we need to be aware of potential risks. If there is a lot of borrowing going on to finance investments and there is a sharp pullback, the financial sector might be exposed,” Dong said.

He stressed that policymakers should guard against excessive leverage buildup while taking advantage of the investment cycle to upgrade domestic capabilities.

Fiscal consolidation is expected to continue, with the deficit projected to narrow to 3.8% of GDP in 2025 from 4.1% in 2024, extending the improvement trend since 2022. Revenue gains from SST expansion, improved tax compliance through e-invoicing and subsidy rationalisation have strengthened fiscal outcomes.

Amro encouraged authorities to broaden the tax base and continue reforms to create durable fiscal space, while redirecting spending towards productivity-enhancing investments and targeted social support.

Over the longer term, Dong emphasised the need to raise domestic value-added content and accelerate skills upgrading to ensure Malaysia captures greater benefits from FDI in higher-technology sectors.

“In this AI age, upgrading workers’ skills will be a very important policy priority,” he said, adding that productivity gains and sustained real wage growth would help underpin consumption on a more durable basis.

With growth holding above 4%, inflation contained at around 2% and the ringgit strengthening on the back of reform progress, Malaysia entered 2026 from a position of relative resilience, though external uncertainties and global trade fragmentation will remain key variables shaping the outlook.

Source: The Sun