Malaysia Economics: Goldilocks For Now, But Risks Still Tilted Towards a (Backloaded) Hike

Research evidence excerpt

Malaysia Economics: Goldilocks For Now, But Risks Still Tilted Towards a (Backloaded) Hike

Malaysia Economic Outlook

With 2Q26 GDP Unexpectedly Accelerating to 5.8% YoY (1Q: 5.4%) On Mining & Manufacturing, We raised our

2026 forecasts to 4.9% (from 4.6%), with growth moderating in 2H26 largely on E&E. Risks remain to the upside.

Headwinds from the ME conflict were largely felt in Mar-May through lower tourist arrivals, and concerns over a

production “cliff” from physical shortages of critical inputs. These headwinds may subside into 2H26, though risks

from the latter have not completely subsided given recent re-escalation

Key growth driver for Malaysia and some regional peers remains AI related tailwinds in E&E and semiconductor

exports, which should stay resilient in 2H26 despite early signs of moderation in the May-Jun data. Export

resilience and realization of earlier investment approvals should in turn cushion manufacturing FDI, with the

investment landscape further augmented by the strong pipeline of Data Centre related FDI and strong FDI

momentum in the JSSEZ

However the capital intensive nature of AI related activities, coupled with earlier labour hoarding has limited the

positive spillovers from growth into jobs. Indeed, job market tightness has started to ease, on moderating services

labour demand. As such, consumer spending has slowed and could remain moderate despite support from fiscal

transfers, civil servant wage hikes and tourism recovery.

Headline and core inflation should both stay benign near 2% in 2026 given subsidies on diesel and absence of

excessive demand pull inflation pressures, creeping up gradually in 2027 to 2.2% and 2.1% respectively.