2026: A Year of Restraint?

 

The World Bank has cautioned that 2026 may be “a year of restraint” for Malaysia, as slowing global and regional growth, weaker export demand and softer domestic consumption are expected to keep economic expansion flat. The projected real gross domestic product (GDP) growth for 2026 is 4.1%. This is the same pace forecasted for 2025. 

The Malaysian economy is highly sensitive to changes in the United States and China’s economies. A one percentage point (ppt) reduction in US growth reduces estimated growth in Malaysia by 0.8 ppt, and a one ppt decline in China’s growth reduces it by 0.45 ppt.

 

Source: https://en.wikipedia.org

Another moderating factor in 2026 is the unwinding of front-loading effects in exports, which are expected to be “flat at 2.9%”. Import growth is also likely to slow to 3.7% in 2026, down from 4.5% this year. 

Moreover, domestic demand – the main driver of growth in 2025 – is also slowing. Easing from 5.2% this year to 4.7% in 2026. The biggest contributor to domestic demand is private consumption, which is expected to slow from 5% this year to 4.9% in 2026. 

Firms are adopting a wait-and-see approach, either delaying or scaling back capital expenditures. The World Bank expects gross fixed capital formation – which is investment – to slow from 7.2% this year to 4.7% for 2026. 

Malaysia continues to grapple with tariff-related uncertainties. Measures to cushion industries affected by the US tariffs are the most pressing short-term priority. The bottom line is that almost 60% of Malaysian goods – by value – are exposed to the US market. Many of these products are now subject to a 19% tariff and are also exported by countries that enjoy lower tariff rates. Based on tariff differentials alone, Malaysia seems more likely to lose its overall share in the US export market. 

Dr Apurva, the lead economist of the World Bank highlighted that the electrical and electronics (E&E) industry – the country’s “golden goose” – is particularly at risk, despite current tariff exemptions. He noted that Malaysia has the highest exposure among Asean countries like the Philippines, Thailand and Vietnam to potential future US tariffs on E&E exports. Another source of uncertainty is the rules of origin. Policies on transshipments and origin rules have yet to be clarified. About 12% of Malaysia’s E&E value-added is tied to Chinese E&E exports. 

The second structural risk is inadequate research and development (R&D). The median R&D-to-sales ratio in Malaysia is much lower than China and Taiwan. The third structural risk is low indigenous innovation. Only 13% to 18% of patents granted by the Malaysian Patent Office went to Malaysian residents. 

He noted the country’s revenue has been on a decline from 2012 to 2025, representing one of the steepest declines globally. Apurva also said the government cannot keep raising the SST rate while continuing to provide support measures, without triggering the negative effects of “tax-on-tax” issues inherent in the SST system. Hence, the current mechanisms are running out of steam, and it is essential for the government to outline a clear revenue mobilisation strategy, even if it does not plan to raise taxes in the near term. 

Reference:

Reviving growth via innovation, revenue, Elim Poon, The Star, 8 October 2025