MALAYSIA is looking to its fourth-quarter growth results to define the economic narrative for 2026, following a stronger-than-expected expansion in the third quarter that reinforced confidence in the country’s recovery trajectory.
Economic momentum gathered pace through 2025 after a cautious start. Gross domestic product expanded by 4.4 per cent in both the first and second quarters before accelerating to 5.2 per cent in the July–September period.
The Q3 performance marked the strongest quarterly growth since 2022 and placed Malaysia on course to achieve around 4.7 per cent growth for the full year, broadly in line with revised official forecasts.
Bank Negara Malaysia is expected to announce the final Q4 GDP figures in the second week of February, while the Department of Statistics Malaysia is likely to release its advance estimate in the third week of January.
Domestic demand remained the backbone of growth throughout 2025, helping to shield the economy from external volatility and tariff-related spillovers.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said internal demand consistently acted as the economy’s stabilising force.
Private consumption continued to underpin growth at around five per cent, supported by steady wage increases, tight labour-market conditions and robust consumer-facing services.
“Public consumption also made a solid contribution, driven by sustained spending on emoluments and essential supplies,” he said.
Investment activity stayed firm, with private investment expanding 9.4 per cent over the first three quarters of the year.
This was supported by construction progress, machinery upgrades and capacity expansion across selected manufacturing and services sectors.
Public investment also remained resilient, underpinned by multi-year infrastructure projects and capital expenditure by public corporations.
“Taken together, domestic demand remained the macro anchor in 2025, offsetting sector-specific softness, absorbing global trade volatility and keeping full-year growth comfortably within the official range,” New Straits Times cited Afzanizam saying.
Inflation pressures are expected to remain contained heading into 2026. Public Investment Bank Bhd analyst Sabrina Edora forecast headline consumer price inflation at 1.9 per cent year-on-year, signalling mild normalisation from 2025 while staying within official comfort levels.
She said the outlook reflected gradual policy-related cost adjustments rather than demand-driven pressures, with inflation kept in check by the absence of excess demand, manageable pass-through from domestic reforms, a benign external commodity environment and a firmer ringgit bias.
“The inflation impulse from fuel policy changes should be limited given the targeted nature of the Budi Madani RON95 mechanism and our expectation of moderate global oil prices,” she said.
However, she cautioned that the expanded scope of the Sales and Service Tax, the rollout of e-invoicing and higher global tariff rates would introduce a more visible cost layer in 2026.
“Pass-through is likely to be uneven and staggered rather than front-loaded, as competitive pressures and margin absorption continue to play a role,” she said, adding that measures such as a multi-tier foreign worker levy and the introduction of a carbon pricing framework should have a contained near-term impact.
On the external front, Kenanga Research expects Malaysia’s export performance to moderate in 2026, projecting growth of 5.1 per cent compared with an estimated 6.0 per cent in 2025.
While exports expanded 6.1 per cent in the first 11 months of last year, momentum was weighed down by weaker mining shipments, supply disruptions, softer commodity prices and a stronger ringgit, which eroded price competitiveness.
Mining exports contracted sharply by 10.3 per cent year-to-date, while manufacturing and agriculture recorded steadier gains of 7.1 per cent and 7.2 per cent respectively.
Looking ahead, Kenanga expects external headwinds to intensify as the effects of higher US tariffs are felt more fully and China’s economic recovery remains uneven.
Still, a gradual upturn in the global technology cycle, supported by demand linked to artificial intelligence, 5G and electric vehicles, is expected to provide some support for Malaysia’s electronics exports.
“Given these conditions, we maintain a cautiously optimistic view on the export outlook, though it remains sensitive to tariff risks, weak global trade momentum and China’s slow recovery,” the research house said.
Political developments are also entering the frame as Malaysia moves closer to the end of the Madani government’s five-year term in December 2027, making the 16th General Election likely in 2027.
iFAST Research said that despite speculation of an early election in 2026, the prevailing view is that the administration is likely to serve its full term.
The firm expects state polls, including Melaka in 2026, and the recently concluded Sabah election to influence political momentum ahead of the national vote.
Sabah-based parties secured a majority of seats, reflecting local dissatisfaction over perceived shortfalls in federal development support.
“Rather than heightening uncertainty, this could prompt faster budget execution ahead of GE16, particularly for infrastructure allocations,” it said.
Historically, the FTSE Bursa Malaysia KLCI has shown no consistent pre-election pattern, although more than half of past elections delivered positive returns in the 180 days before polling, averaging about 5.97 per cent.
“Against this backdrop, we hold a positive view on pre-election sentiment in 2026, supported by expectations of faster spending rollout and a more active policy environment,” it added.
Malaysia entered 2026 with firmer investor confidence, aided by clearer macroeconomic policies and longer-term strategic planning.
Principal Malaysia’s chief investment officer for equities Lee Chun Hong and chief investment officer for fixed income Wong Loke Ching said sentiment has improved, although uncertainties persist.
They pointed to challenges arising from a stronger ringgit for export-oriented sectors and Malaysia’s relatively low weight in global indices, which limits sustained foreign investor participation.
“Income remains a central theme for investors heading into 2026,” they said, highlighting fixed income, multi-asset income strategies and dividend-oriented equities as sources of stability, alongside global diversification.
Moving forward, Afzanizam said Bank Muamalat projects Malaysia’s GDP growth at 4.1 per cent in 2026, near the lower bound of the Finance Ministry’s forecast range of 4.0 to 4.5 per cent.
Domestic demand is expected to remain the primary growth engine, while external demand is likely to act as a drag as higher US tariffs apply throughout the year.
Private consumption should remain resilient, supported by a tight labour market with unemployment around 3.0 per cent, phased civil service wage adjustments and the existing subsidy framework.
Investment is expected to play a larger role than in previous cycles, driven by data centre developments and semiconductor upgrades in Johor and the Klang Valley, energy-transition projects and the early implementation of the 13th Malaysia Plan’s focus on high-value manufacturing.
“Overall, 2026 points to moderating but stable growth,” Afzanizam said. “Downside risks are tilted to the downside, centred on a heavier-than-expected drag from the tariff regime, uncertainty over sector-specific trade measures, geopolitical disruptions to trade and energy flows, and sustained volatility in global financial markets.” - January 3, 2025
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