Malaysia’s Economy To Grow 4-5 Pct In 2026 Backed By Domestic Resilience

By Harizah Hanim Mohamed and Siti Noor Afera Abu

KUALA LUMPUR, March 31 (Bernama) -- Bank Negara Malaysia (BNM) estimates Malaysia’s economy to grow between four per cent and five per cent this year compared with 5.2 per cent registered in 2025, with the country’s domestic resilience and diversified export structure continuing to provide buffer to navigate the current external headwinds mainly from conflict in West Asia.

Household spending, expanding investment and sustained global demand, particularly for electrical and electronics (E&E) exports, alongside steady tourism amid Visit Malaysia 2026 and Malaysia’s position as a net energy exporter, are expected to help the country navigate ongoing geoeconomic shifts, which represent evolving structural changes with long-term implications.

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Delving into the sectoral details, the BNM Economic and Monetary Review 2025 released today, reported that the services sector, which contributed 59.6 per cent to the country’s Gross Domestic Product (GDP) which is expected to grow at 5.2 per cent this year (2025: 5.5 per cent), with the consumer-related subsector expected to remain resilient as household spending remains forthcoming.

“Continued operationalisation of data centre activities will support ICT subsector growth, while the transport and storage subsector will benefit from air passenger traffic driven by tourist arrivals, commencement of LRT3 and new highways, as well as continued trade growth,” it said.

The manufacturing sector, which accumulated 23 per cent of the GDP, will continue to grow, albeit at a more moderate pace at 4.3 per cent (2025: 4.5 per cent).

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The E&E industry will be supported by the ongoing strong demand related to AI, while consumer-related industries are expected to benefit from resilient household spending.

Meanwhile, growth in the agriculture, mining and quarrying sectors would register a contraction to the contribution to GDP, each at -1.0 per cent and -1.2 per cent in 2026 compared with 2.2 per cent and 0.7 per cent last year.

The construction sector is expected to expand by 9.1 per cent, driven by continued activities across all subsectors.

“While some large infrastructure projects are nearing completion, growth in the civil engineering subsector will continue. It will be supported by the sustained development expenditure of the government including for provision and upgrades of essential public infrastructure under the Budget 2026,” it said.

Looking into the investments, BNM said that investment activity will continue to expand, albeit at a more moderate pace.

“While intensified competition from China’s production surpluses will continue to weigh on non-E&E exports, the E&E sector will benefit from strong semiconductor demand and the ongoing realisation of data centre investments,” the central bank said.

BNM, however, cautioned that the conflict in West Asia may weigh down exports and tourism activities as the growth outlook for the Malaysian economy remains subject to uncertainties.

Overall, external downside risks could arise from weaker global trade amid the conflict in West Asia and tariffs.

For the domestic sector, lower-than-expected commodity production due to adverse weather conditions or unplanned maintenance could weigh on growth prospects.

“On the upside, better-than-expected global growth outlook, stronger demand for electric and electronic (E&E) and more robust tourism activity could boost Malaysia’s export and growth prospects,” it said in the Economic and Monetary Review 2025, released today.

Domestic resilience buffers against external risks

BNM said domestic demand will remain the main driver of growth, supported by steady private sector spending.

On household spending, BNM said household spending will continue to be underpinned by firm labour market conditions and ongoing fiscal support.

Labour market conditions are expected to remain firm as employment growth continues and the unemployment rate is expected to remain low at 2.9 per cent

It said continued income, supported by steady economic growth and civil servant salary adjustment will support private consumption, which would grow by five per cent this year.

Also, the central bank said investment activity is expected to maintain its momentum from the current investment upcycle, albeit expanding at a more moderate pace.

The realisation of the high number of approved projects in 2025 will provide a solid foundation for continued growth and Malaysia’s strong fundamentals, deep and extensive production ecosystem and supportive policy measures will sustain investor confidence.

BNM elaborated that the ongoing public investment projects, particularly in transport and energy-related projects, naming among others, Petroliam Nasional Bhd’s Kasawari Carbon Capture Storage project, Tenaga Nasional Bhd’s hydro and solar initiatives as well as the Mutiara LRT Line would continue to support growth throughout the year.  

“Hence, risks from reshoring of foreign investments in response to global trade pressure are likely to remain contained. Strong global demand for AI-related technologies and services, together with continued digitalisation and automation will support investment growth in 2026,” it said.

On the trade outlook, BNM emphasised that Malaysia’s trade outlook is expected to remain challenging in 2026 as exporters contend with new developments and uncertainties surrounding tariff and geopolitical conflict.

However, the central bank said the country’s diversified export structure would cushion the impact.

At the same time, import growth is expected to pick up in line with the gradual recovery of intermediate imports to support the continued expansion of manufactured exports.

This will be partly offset by the normalisation of capital import growth after a strong expansion in 2025.

Expansion in All Economic Sectors

Most economic sectors are expected to record slower growth in 2026, with the services and manufacturing sectors expected to continue to drive overall growth.

Malaysia’s gross exports are expected to grow by 8.6 per cent in 2026 (2025: 6.4 per cent). Manufactured exports, which accounted for 86 per cent of total exports in 2025, will remain the key driver with a projected expansion of 9.6 per cent (2025: 7.7 per cent).

Growth will be supported by robust E&E exports amid the global shift toward AI-related technologies as Malaysia’s prominent role in the global E&E supply chain will benefit from the continued demand for semiconductors and advanced electronic components.

West Asia Oil Shocks: Impact on Malaysia’s 2026 Growth and Inflation

As an open economy, Malaysia’s growth and inflation outlook is sensitive to geopolitical and global energy price developments.

The West Asia conflict transmits to the domestic economy mainly through three key channels; first, higher energy prices raise import costs and subsequently exert upward pressure on domestic production costs and consumer prices.

These, in turn, could dampen household spending and business activity.

“Second, weaker external demand following oil price shocks could weigh on exports and overall growth.

“Third, elevated oil prices and heightened uncertainty increase risk aversion, prompting a shift towards safe-haven assets.

“This leads to more volatile capital flows across emerging markets, including Malaysia, with potentially adverse spillover on domestic financial conditions and exchange rate,” it said.

However, BNM also highlighted that these effects may be partly mitigated by higher commodity-related export earnings, given Malaysia’s position as a net energy exporter.

“Existing targeted fuel subsidies would also help cushion the transmission of higher global energy prices to domestic inflation and the economy.

“The overall impact on Malaysia will depend on how long the conflict lasts, how severe the disruption is, and how far it affects the global energy production and logistics,” BNM added.

-- BERNAMA