Malaysia Economics: Stagflationary Challenges Reduced, But Not Removed

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Malaysia Economics: Stagflationary Challenges Reduced, But Not Removed

Malaysia Economic Outlook

We expect 2026 growth to slow to 4.6% (from 5.2% in 2025, 2027f: 4.8%), and expect a gradual slowdown in

2Q26-3Q26 on reduced stagflationary drags from de-escalation of the Middle East conflict

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. De-escalation should turn these

headwinds into tailwinds

The 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 some moderation. 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% given subsidies on diesel and lack of excessive

demand pull inflation pressures. Nonetheless some upside risks still remain on delayed pass through of

pipeline cost pressures - including from earlier policy reforms - which have squeezed firms’ profit margins

Risks of significant fiscal slippage vs Budget 2026 targets have eased on lower oil prices, with the expanded