OECD Economic Outlook, Volume 2026 Issue 1

Malaysia

GDP is projected to grow by 4.2% in 2026 and 4.8% in 2027. Private consumption is expected to remain robust, underpinned by favourable labour market conditions. Investment will be buoyed by technology-intensive sectors including semiconductors. Inflation is expected to rise, driven by wage increases, higher energy prices and associated second round effects. External demand is set to weaken amid high global energy prices, value-chain disruptions and high uncertainty. The evolving conflict in the Middle East and renewed global trade tensions constitute key risks for Malaysia’s manufacturing exports.

Maintaining fiscal consolidation would build fiscal space for future spending needs in social protection, education and the green transition. This could be achieved by phasing out energy subsidies, while strengthening targeted support to vulnerable groups, and mobilising additional tax revenues. Monetary policy is broadly neutral and should remain vigilant to emerging price pressures, raising interest rates if needed. Relaxing foreign equity caps and phasing out price controls could boost productivity, while involving employers in the curriculum design for vocational and higher education could reduce skill mismatches.

Growth has moderated but remains solid

Quarterly GDP stalled in the first quarter of 2026, reflecting weaker domestic and foreign demand. On a year-on-year basis, growth moderated to 5.4%, down from 6.2% in the previous quarter. The labour market remained strong, with the unemployment rate at an all-time low of 2.9% and the labour force participation rate at an all-time high of 70.9%. Nonetheless, private consumption weakened substantially in the first quarter, while government consumption contracted. Investment also slowed, after having outpaced regional peers over most of 2025, buoyed by a surge in foreign direct investment in electrical and electronics products related to data centres and artificial intelligence. Headline and core CPI stood at 1.9% and 2.0%, respectively in April 2026. Fuel prices have been kept fixed for most users, and implicit subsidies have increased amid rising global oil prices.

Malaysia

Source: CEIC.

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Malaysia: Demand, output and prices

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Merchandise exports were resilient in 2025 with higher electrical and electronics products exports underpinned by robust global demand for semiconductor-related goods which support artificial intelligence and data centre investment. Service exports, particularly tourism, have been and are expected to remain robust. As a net energy exporter, driven by strong exports of natural gas, Malaysia is less affected by the evolving conflict in the Middle East than other Southeast Asian economies. Shortages are unlikely to arise on a broad scale but could affect specific types of refined petroleum products.

Subsidies have been reduced while monetary policy remains broadly neutral

Fiscal outcomes have improved thanks to strong economic growth and consolidation efforts. However, public debt is higher than in regional peers and projected to stay above 60% of GDP. Subsidies absorb a sizeable share of expenditure and the government has made progress in rationalising certain subsidies, such as electricity and selected food items. The government’s recent decision to maintain the retail price for RON-95 petrol at MYR 1.99 per litre is expected to minimise the pass-through of higher oil prices to households in the short term, but increases fiscal costs. The monetary policy stance has been broadly neutral after a 25 basis points cut to 2.75% in July 2025 and is expected to remain so during 2026 and 2027.

The economy will grow moderately, but faces significant downside risks

GDP is projected to grow by 4.2% in 2026 and 4.8% in 2027, led by domestic demand. Private consumption is expected to remain firm against the backdrop of solid employment and wage growth. Public investment is expected to underpin the economy as infrastructure projects progress. Tech-related exports and demand for semiconductor-related products are expected to be resilient. Inbound tourism will remain strong due to the campaign which aims to welcome 47 million tourists but the impact of the evolving conflict in the Middle East is uncertain. Malaysia is tightly integrated in global value chains and vulnerable to changes in the global economic environment, including supply chain disruptions and trade barriers. An abrupt end to the recent surge in demand for AI-related electronics would be a risk for Malaysia, given the significant investment inflows in this sector.

Fiscal consolidation and regulatory reforms can improve growth prospects

Fiscal consolidation should be stepped up to build fiscal space against future spending needs related to social protection and the green transition as well as emerging challenges. This will require redesigning energy subsidies while protecting low-income households with targeted transfers and mobilising additional revenue sources, such as re-introducing a broad value-added tax. The central bank should continue to monitor potential inflationary pressures from higher wages, an eventual reduction of fuel subsidies and higher energy prices and be prepared to raise rates if needed. Boosting productivity will hinge on relaxing relatively restrictive product market regulations that limit market entry and competition, especially in services such as retail trade where price ceilings on essential goods limit competition. There is also scope for re-evaluating the costs and benefits of state-owned enterprises (SOEs) in sectors where the private sector is operating efficiently while creating a more level playing field by improving SOEs governance. Support to small and medium enterprises, whose productivity is lagging, could be streamlined and consolidated to increase efficiency and reduce duplication. Public sector efficiency could be enhanced by fully implementing the Government Service Efficiency Commitment Act 2025, streamlining bureaucracy, and expanding digital government services. Increasing human-capital investment and addressing skill mismatches are critical, including by involving the private sector in the design of vocational and higher education curriculums.