Outlook and Policy in 2026

Global economic growth is expected to continue growing at a more moderate pace in 2026 (2.7%–3.2%; 2025: 3.4%), supported by resilient domestic demand including robust investment in technology and digitalisation, particularly artificial intelligence (AI). The prevailing monetary policy condition and fiscal support are expected to provide an additional lift to economic activity. Nonetheless, global growth is expected to face ongoing headwinds from the impact of higher tariffs, the uncertainty surrounding them, as well as heightened geopolitical conflict in the Middle East.

Growth in advanced economies is projected to remain resilient, underpinned by firm household spending amid broadly supportive monetary and fiscal policies. In the US, consumption will continue to drive economic activity despite recent signs of labour market softening, while the further pass-through from tariffs will be most pronounced in the first half of 2026 before tapering off thereafter. This will be supported by ongoing fiscal measures such as the extension of tax cuts, easing monetary policy and elevated household net wealth. Meanwhile, strong investment in technology and digitalisation, particularly in AI-related applications is expected to be a key growth driver. In the euro area, growth will be sustained by resilient labour markets and supportive fiscal measures. In particular, Germany’s ongoing government spending on defence and infrastructure projects are expected to lend support to growth.

Regional economies are expected to grow steadily, supported by household spending and supportive fiscal and monetary policies. Investments will be supported by robust demand for AI, reflecting the region’s central role in global semiconductor production. China, Chinese Taipei, Japan and Korea account for a large share of advanced fabrication capacity needed for the AI and electrical and electronics (E&E) supply chain.^[1] Nevertheless, trade-reliant economies could face headwinds from slower global trade as the temporary boost from frontloaded shipments fades. In China, despite continued fiscal support, growth is expected to soften further, weighed down by prolonged property market weakness and tariff-related pressures.

Global trade growth is projected to slow in 2026 as the temporary boost from frontloaded shipments in 2025 fades and the impact of tariffs materialises, particularly in non-E&E product segment.^[2] While the tariff rates are lower following the US Supreme Court ruling in February 2026, tariff uncertainty has re-escalated, at least in the near-term. Geopolitical conflict will also weigh on supply chains and investment decisions, leaving global trade growth below its historical average. Despite these headwinds, trade will be supported by stronger demand for E&E and machinery and equipment (M&E), anchored by technological upgrades and infrastructure investment. With global AI spending projected to reach around USD2.5 trillion in 2026^[3] (2025: USD1.8 trillion), export of AI-related products is also expected to support global trade. The high valuation of the technology companies and the attendant risk of a market correction pose a risk to this positive prospect. Meanwhile, steady growth in global tourism activity will provide a modest offset to weakness in goods trade.

The prevailing disinflationary trend in global headline inflation now faces greater uncertainty as the ongoing Middle East conflict disrupts energy markets and supply chains. This raises risks of higher inflation in 2026 through increased energy prices and transportation costs. Additionally, tariff-related measures could also exert upward pressure on prices, particularly in the US as tariff pass-through keep price pressures above those in other major economies. Services inflation in advanced economies may also remain sticky given persistent wage pressures.

Global financial conditions are expected to remain broadly accommodative in 2026, underpinned by generally supportive monetary policy. However, the pace and scale of policy normalisation are expected to slow, as central banks maintain a cautious stance amid more pronounced inflation risk from higher energy prices. In this environment, financial markets are likely to remain sensitive to shifts in expectations around the US monetary policy path. As a result, forthcoming US inflation and labour market data releases alongside ongoing geopolitical developments could continue to prompt bouts of volatility across global financial markets.

While progress on trade negotiations in 2025 has helped ease some global uncertainties, financial markets remain prone to episodes of elevated volatility. This reflects heightened sensitivity to changes in monetary policy expectations, evolving trade and geopolitical dynamics, and the risk of market corrections amid elevated asset valuations in segments linked to AI-related investments. Against this backdrop, a continued but modest narrowing of interest rate differentials between advanced economies and several emerging markets could support capital inflows. These inflows would be more pronounced for emerging markets with strong fundamentals and favourable economic prospects.

Global growth risks are tilted to the downside

Risks to the global growth outlook are tilted to the downside. Higher and more product-specific tariffs could weigh on global trade flows. Prolonged and more destructive conflict in the Middle East could further push commodity prices higher, affecting financial markets, global inflation and growth. Concerns over elevated financial markets valuations could also increase the risk of corrections, with potential spillovers to economic activity. On the other hand, stronger-than-expected technology spending, a milder tariff impact on economic growth and greater policy support in major economies could help cushion these risks.

The Malaysian economy is projected to grow between 4% and 5% in 2026

Malaysia’s growth is expected to remain resilient in 2026 (Chart 2.2). Domestic demand will remain the main driver of growth, supported by steady private sector spending. Labour market conditions are expected to remain firm, as employment growth continues and the unemployment rate declines. Continued income, supported by steady economic growth and civil servant salary adjustment,^[4] will support private consumption. Moreover, fiscal support in the form of cash assistance and measures announced in Budget 2026 are expected to further lift consumption, particularly among lower-income households.

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 approved projects in 2025 will provide a solid foundation for continued growth. Malaysia’s strong fundamentals, deep and extensive production ecosystem and supportive policy measures will sustain investor confidence. Hence, risks from reshoring of foreign investments in response to global trade pressure are likely to remain contained.^[5] Strong global demand for AI-related technologies and services, together with continued digitalisation and automation, will support investment growth in 2026. Capacity expansion in the private sector will be driven by E&E as well as information and communications technology (ICT) sectors. The continued implementation of national masterplans across both the private and public sectors, including initiatives under the Thirteenth Malaysia Plan (RMK-13) will also provide additional impetus to economic activity. Ongoing public investment projects, particularly in transport and energy-related projects, will continue to support growth throughout the year. These include PETRONAS’s Kasawari Carbon Capture Storage (CCS) project, Tenaga Nasional Berhad’s Hydro and Solar initiatives as well as the Mutiara LRT Line.

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, Malaysia’s diversified export structure and several supportive factors are expected to cushion the impact. The E&E sector is poised to gain from strong semiconductor demand in 2026^[6] amid the global technology expansion, digitalisation and acceleration of AI adoption. Robust E&E ecosystem and earlier investments to move towards higher value-added activities, such as advanced packaging, have enabled the sector to be in a prime position to capture these opportunities. The realisation of data centre investments, particularly those with AI capabilities will strengthen Malaysia’s ICT ecosystem linkages and encourage more sophisticated manufacturing activities. Additionally, newly operational data centre facilities will also provide some support to ICT services exports.^[7] It is recognised that the global AI momentum remains sensitive to shifts in global financial markets, which shape financing conditions and capital allocation to AI-related investments. A correction in the valuation of AI-linked equities, for instance, may lead to lower investment in AI companies and spillover to related production and trade activities.

Services exports will also benefit from steady inbound tourism during Visit Malaysia Year 2026. Tourist arrivals will be supported by visa exemption for visitors from China and India, continued international flight connectivity, as well as ongoing promotional efforts in conjunction with the Visit Malaysia Year 2026.

The outlook for non-E&E exports remains mixed, reflecting both persistent production surpluses in China and recent geopolitical conflict. The oversupply may keep competitive pressures elevated across selected non-E&E segments, while geopolitical conflict could affect price and demand conditions, especially in petroleum and chemical products.

Meanwhile, 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.

The growth outlook for the Malaysian economy remains subject to uncertainties. Externally, downside risks stem from slower-than-expected global trade due to geopolitical conflict in the Middle East and tariffs. Domestically, 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 E&E and more robust tourism activity could boost Malaysia’s export and growth prospects.

Inflation is expected to remain moderate and close to its long-term average in 2026

Headline inflation is expected to remain moderate, averaging between 1.5% and 2.5% in 2026. Global commodity prices are projected to experience greater volatility amid the conflict in the Middle East. Nevertheless, the stronger exchange rate could provide some support in containing import prices. Domestic policy measures will also help mitigate the pass-through of global cost pressures to domestic prices. In turn, cost pressures faced by firms are expected to remain manageable, with pricing behaviour remaining generally cautious across the retail and services segments. Overall, these developments point to a relatively contained inflation path over the course of the year.

Underlying inflation, as measured by core inflation, is expected to remain close to its long-term average. This is consistent with expectations of economic activity remaining in line with potential, without generating material demand-driven inflationary pressures. Core inflation is projected to average between 1.8% and 2.3% in 2026.

The inflation outlook remains primarily dependent on external risks. Upside risks could stem from prolonged supply disruptions and trade policy uncertainty, including higher input costs from elevated global commodity prices which could be amplified by the conflict in the Middle East and weather disruptions. In such scenarios, sectors that are more sensitive to import prices, such as food, could face stronger cost pressures. Some producers and retailers could also opportunistically raise prices. On the downside, weaker global demand could weigh on domestic activity, while softer global commodity price developments could lower imported costs and ease inflationary pressures. Exchange rate developments would also have a bearing on imported cost pressures, which could affect inflation outcomes.

Domestic monetary and financial conditions are expected to remain supportive of economic activity

Developments in domestic financial markets are expected to remain broadly favourable. This is supported by generally accommodative global financial conditions and Malaysia’s strong economic fundamentals. In the bond market, Malaysian Government Securities (MGS) yields are expected to remain broadly supported by the global interest rate environment and gradual foreign inflows. A more favourable exchange rate environment could lift currency-adjusted returns and attract investor interest in domestic bonds. Meanwhile, domestic equity market performance is expected to be underpinned by improving investor confidence, supported by Malaysia’s positive growth prospects.

Financing conditions will remain supportive in 2026, underpinned by sustained credit growth amid continued economic expansion and conducive borrowing conditions. Banks remain well-positioned to provide credit, given their strong capital buffers, supportive liquidity conditions and manageable funding costs. As such, credit to the private non-financial sector is expected to remain forthcoming. On the demand side, credit growth will continue to be supported by steady economic activity, favourable labour market conditions, and ongoing domestic policy support measures. Business loan growth is expected to remain firm in line with sustained investment momentum, while corporate bond issuance is likely to remain attractive given competitive yields.

Risks to domestic financial conditions stem mainly from external developments. In particular, unexpected shifts in expectations around the US monetary policy path, market corrections amid elevated valuations of AI-related equities, and heightened geopolitical uncertainties, particularly in the Middle East, could prompt episodes of global financial market volatility. This may lead to periods of intermittent volatility in capital flows and exchange rates. Nevertheless, spillovers to domestic financial conditions are expected to remain manageable. This reflects Malaysia’s strong economic fundamentals, a deep domestic institutional investor base, and a well-capitalised banking system with sufficient buffers. Asset prices are expected to adjust in an orderly manner, supported by healthy trading activity and broad-based investor participation. Bank Negara Malaysia (BNM) will continue to monitor developments and ensure adequate liquidity in the domestic financial system to support smooth market functioning. In the foreign exchange market, BNM will continue to maintain orderly conditions. This includes ongoing measures to encourage two-way flows through engagement with exporters and corporates, as well as the Qualified Resident Investor (QRI) programme.

Monetary policy will remain focused on fostering conditions that support sustainable economic growth while keeping inflation contained

In 2026, monetary policy decisions will continue to be guided by the Monetary Policy Committee’s (MPC) assessment of risks to Malaysia’s inflation and growth outlook. The MPC remains committed to supporting sustainable economic growth in an environment of price stability.

Domestic growth is expected to remain firm, supported by resilient domestic demand amid steady private sector expenditure. Nevertheless, external headwinds pose downside risks, including slower global trade amid geopolitical and tariff-related uncertainties. On the domestic front, lower-than-expected commodity production could also weigh on growth. On the upside, growth could benefit from stronger global activity, firmer demand for E&E goods and more robust tourism activity.

Inflation is projected to remain moderate. While global commodity prices may be subject to greater volatility given recent developments, the impact on domestic inflation is expected to be contained. Upside risks could stem from renewed external cost pressures, while downside risks may arise from softer global growth and more moderate domestic demand conditions.

The MPC aims to maintain a monetary policy stance that is supportive of economic activity, while preserving price stability. This is guided by the prevailing assessment on the balance of risks to Malaysia’s inflation and growth outlook, taking into account underlying economic and financial conditions. As such, monetary policy will remain data-dependent, with the MPC closely monitoring developments and their potential spillovers to the Malaysian economy.

Domestic demand to remain the main driver of growth

In 2026, domestic demand, particularly private sector spending, will remain the anchor of growth for the Malaysian economy. The external sector will benefit from continued global technology expansion and steady tourism activity supported by Visit Malaysia Year 2026 amid challenges surrounding global uncertainties, including the conflict in the Middle East.

Private consumption is projected to grow by 5% (2025: 5.2%). Growth will be driven by firm labour market conditions and continued income growth. Employment will continue to expand, led by hiring in manufacturing and services sectors. The unemployment rate is expected to remain low at 2.9%. Income growth will also be supported by sustained domestic activity and income-related policies through the civil servant salary adjustment under Phase 2 of the Public Service Remuneration System (Sistem Saraan Perkhidmatan Awam, SSPA). Fiscal measures through cash transfers and BUDI95, alongside the Overnight Policy Rate (OPR) reduction in July 2025, will also be supportive to household spending.

Gross fixed capital formation (GFCF) is expected to expand by 7.4% (2025: 9.6%). Growth will be driven by multi-year projects across both structures, and machinery and equipment (M&E)-related investments, supported by the forthcoming realisation of investment approvals. As such, the investment upcycle is expected to extend into 2026, albeit at a more moderate pace.

Private investment is projected to grow by 7.5% (2025: 9.4%). The realisation of the high level of investment approvals in the past couple of years, particularly in the high-technology sub-sectors such as information and communications technology (ICT), and electrical and electronics (E&E) are expected to support capital expenditure by both domestic and foreign investors. Of significance, around 84.9% of manufacturing projects approved between 2021 and 2025 are in various phases of implementation. The global technology expansion and advancements in automation and digitalisation are expected to boost investment in high-value and innovation-driven activities. Additionally, sustained early-stage construction activity (2025: RM40.5 billion; 2024: RM33.9 billion) suggests positive investment prospects going forward. While the pipeline of new investments remains strong, the growth rate is expected to moderate on account of the large base effect from strong investments in prior years. This will result in some normalisation of private investment growth in 2026.

Public investment is expected to grow at a more moderate pace of 7.3% (2025: 10.3%). This reflects the near completion of several large infrastructure projects. Growth will be supported by catalytic investments in strategic sectors such as utilities, energy and transportation. The focus will be on projects to enhance electricity generation capacity, upgrade railway networks, and improve public transport services. The rollout of projects under the national master plans, including Budget 2026 and the Thirteenth Malaysia Plan (RMK-13), and the continued progress of existing projects will further support growth in public investment in 2026.

Public consumption is expected to expand by 4.9% (2025: 6.6%). Growth will be driven mainly by the Government’s continued emoluments spending amid Phase 2 of civil servant salary adjustment under the SSPA. The supplies and services expenditure, however, is expected to grow more moderately. This is in line with the Government’s commitment to improve spending efficiency while sustaining public service delivery.

 

Expansion in most economic sectors

Most economic sectors are expected to grow in 2026, except for the agriculture and mining sectors. The services and manufacturing sectors are expected to continue to drive overall growth.

The services sector is expected to grow at 5.2% (2025: 5.5%). The consumer-related subsector is expected to remain resilient as household spending remains forthcoming. Tourism activities will be lifted by the Visit Malaysia Year 2026 campaigns, notwithstanding some travel disruptions from the Middle East conflict. Continued operationalisation of data centre activities will support ICT subsector growth. Real estate and business services subsector are expected to strengthen, in line with continued growth in construction activities. 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. Growth of the finance and insurance subsector will be underpinned by sustained loan demand and rollout of insurance products aligned with consumer needs. Meanwhile, the Phase 2 of civil servant salary adjustment under SSPA will continue support government services subsector.^[8]

The manufacturing sector will continue to grow, albeit at a more moderate pace at 4.3% (2025: 4.5%). 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. However, growth of primary-related industry would remain subdued. This reflects the stiff competition from lingering global excess capacity within the industry.

The agriculture sector is projected to contract by -1.0% (2025: 2.2%). Crude palm oil production is expected to normalise following the strong yields recorded in late 2025, while ongoing replanting activities in East Malaysia will also weigh on output. Meanwhile, innovative planting methods such as the Five Seasons in Two Years paddy planting program (Penanaman Padi Lima Musim Dalam Tempoh Dua Tahun) are expected to support paddy production. Continued technological enhancements would also support production of other food crops such as fruits and vegetables. 

The mining sector is projected to contract by -1.2% (2025: 0.7%). Maturing fields continue to weigh on oil production. In addition, planned maintenance activities in oil and gas fields are expected to affect output.

Growth in the construction sector is expected to expand by 9.1% (2025: 12.2%), 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 as announced under the Budget 2026. The non-residential subsector will continue to be buoyed by strong demand for industrial spaces, driven in part by steady pipeline of data centres projects. The residential subsector will continue to see launches of affordable new housing projects from both private and public developers. Activities in these three subsectors will also translate to more early-stage and finish work, boosting the special trade subsector.

 

Continued growth in exports and imports in 2026

Malaysia’s gross exports are expected to grow by 8.6% in 2026 (2025: 6.4%). Manufactured exports, which accounted for 86% of total exports in 2025, will remain the key driver with a projected expansion of 9.6% (2025: 7.7%). Growth will be supported by robust E&E exports amid the global shift toward AI-related technologies. Malaysia’s prominent role in the global E&E supply chain will benefit from the continued demand for semiconductors and advanced electronic components. Meanwhile, the outlook for non-E&E exports is expected to be more mixed. Exports of refined petroleum and petrochemical products may benefit from higher product prices amid the ongoing conflict in the Middle East, while other non-E&E products are likely to continue to be weighed by intense regional competition driven by higher exports from China.

Commodity exports are expected to recover slightly by 1.6% in 2026 (2025: -2.4%). This is mainly attributed to the recovery in mining exports which is projected to rebound by 13% (2025: -10.8%), following higher global prices of crude oil and LNG exports. Meanwhile, agriculture exports is expected to register a decline of -7.6% due to lower CPO production amid yield normalisation following exceptionally strong output in 2025 and ongoing replanting activities.

Potential upsides to the export outlook include stronger-than-expected tech demand, robust inbound tourism, as well as faster ICT and data centre rollout, which may provide additional support to overall export growth. At the same time, risks remain from potential disruption to global trade from the ongoing geopolitical and trade tensions, further payback from frontloading of exports to the US, and larger-than-expected impact of ringgit appreciation on Malaysia’s export competitiveness. Supply disruptions from adverse weather conditions and unplanned maintenance could also affect commodity-related exports. 

Gross imports are projected to grow by 9% in 2026 (2025: 6%). Capital imports are expected to moderate while remaining elevated, following the strong growth in 2025 due to data centre and E&E-related investments. Meanwhile, intermediate goods imports are anticipated to recover in line with expectations for continued growth in manufactured exports.

 

Sustained current account surplus

The current account of the balance of payments is expected to remain in surplus, ranging from 1.5%–2.5% of GDP in 2026 (2025: 1.6% of GDP). This is driven mainly by continued goods and services surplus despite a challenging external environment, which is partially offset by a widening of primary and secondary income deficit.

The goods account is projected to record a higher surplus of RM128.1 billion (2025: RM110.9 billion), as exports level continue to exceed imports. Meanwhile, the services account is expected to record a higher surplus of RM5 billion (2025: RM1.2 billion), supported by a larger surplus in the travel account, reflecting continued tourist arrivals, partly supported by the Visit Malaysia Year 2026 campaign. Additionally, newly operational data centre facilities will also provide support to ICT services exports.

The primary income account is projected to remain in deficit (-RM74.2 billion, 2025: -RM69.5 billion). This is driven by the continued income payment accrued to foreign investors in Malaysia amid continued profitability of multinational companies (MNCs) operating in Malaysia. Similarly, the secondary income account is also expected to remain in deficit (-RM13.2 billion, 2025: -RM10.8 billion), due mainly to outward remittances by foreign workers. Nevertheless, this is expected to be partly cushioned by inward remittances from Malaysians working abroad.

 

The economy remains near potential in 2026

Potential output reflects the amount of goods and services an economy could produce without generating excess inflationary pressures given the available factors of production (i.e. labour and capital) and productivity. The output gap is a measure of the difference between the economy’s actual output and potential output. This relationship serves as a key indicator for monetary policy, as it is an estimate of spare capacity in the economy, provides early signs of inflationary pressures and supports more informed policy formulation.

As potential output and the output gap of the economy cannot be observed directly, they can only be inferred or derived from other information. Various techniques are used to estimate potential output, including statistical filters, econometric modelling of production functions, and dynamic stochastic general equilibrium (DSGE) frameworks. These estimates are therefore subject to a high degree of uncertainty.^[9]

In 2025, Malaysia’s potential output^[10] is estimated to have expanded by 4.8% (2024: 3.9%; 2011–19 average: 4.9%). The expansion was attributed to higher capital accumulation, in line with robust investment activity (2025: 9.6%; 2024: 12%; 2011–19 average: 6.8%). Labour utilisation improved with the unemployment rate declining to below pre-pandemic levels while the labour force participation rate increased to 70.9% (2024: 70.5%; 2011–19 average: 67.3%). As the level of actual output was higher relative to the potential output, the output gap^[11] is estimated to have been positive in 2025, at 1% above the potential output (2024: 0.6%).

Potential output growth can also be decomposed to capture both the availability of production inputs as well as how efficiently and intensively they are utilised when producing goods and services. Using the production function modelling framework,^[12] they can be indicated by the availability of labour, capital, and changes in total factor productivity (TFP). Between 2022 and 2024, Malaysia’s potential output growth has been driven largely by capital accumulation, reflected in higher capital stock. The contribution from labour has also risen, returning to levels close to those observed prior to the COVID-19 pandemic.

Going forward, the Malaysian economy is expected to remain close to potential, with a marginally positive output gap in 2026. Potential output is projected to grow at its pre-pandemic levels of 4.5%–5.5% while actual output growth is forecast to expand by 4%–5%, supported by domestic demand. In the near term, potential output growth is expected to be supported by capital accumulation and productivity gains amid higher investments in strategic sectors, particularly ICT and E&E.

 

Oil price shocks from the conflict in Middle East: Implications to Malaysia’s growth and inflation outlook in 2026

In late February 2026, geopolitical tensions in the Middle East escalated sharply following the onset of a military conflict, disrupting regional oil and gas production, as well as associated supply chain and logistics. Concerns over safety, rising insurance costs, and the subsequent withdrawal of major commercial shipping operators led to significant disruptions in maritime traffic through the Strait of Hormuz. The strait carries nearly 20% of the global oil supply daily. Beyond shipping disruptions, the conflict has also forced temporary closures of key oil production facilities across the Middle East region due to infrastructure damage and overfilled storage capacity, further constraining global supply. These combined factors sharply increased global oil prices^[13] and raised concerns over spillovers to global inflation and growth. The conflict has also led to heightened volatility in the financial markets and tighter financial conditions in a large number of economies, which could further weigh on economic activity.

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

However, these effects may be partly mitigated by higher commodity-related export earnings, given Malaysia’s position as a net energy exporter.^[14] Existing targeted fuel subsidies would also help cushion the transmission of higher global energy prices to the domestic inflation and 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. During previous episodes of military conflict, oil prices increased significantly for three to six months before gradually declining to its pre-conflict level (Chart 2). However, outcomes have varied across different episodes, and the current Middle East conflict could unfold differently. If hostilities remain contained and de‑escalate gradually, disruptions may be short‑lived, characterised by temporary production outages and partial shipping disruptions through the Strait of Hormuz, with strategic reserves helping to cushion near‑term supply shortfalls. In such circumstances, oil prices are likely to settle at elevated but manageable levels, with limited spillovers to global growth, trade and inflation.

By contrast, more persistent disruptions, could result in prolonged disruptions to maritime traffic, sustained damage to energy infrastructure, and extended production shutdowns across major Gulf producers. This would keep oil prices elevated for longer, dampen external demand, and weigh on global trade and growth. In this scenario, domestically, elevated energy and input costs could increase the likelihood of broader cost pass-through to consumer prices, posing risks of more persistent inflationary pressures. This would erode household purchasing power and amplify the drag on domestic demand.

Of great significance, Malaysia is entering this period from a position of strength, supported by robust domestic demand, moderate inflation, a sound financial sector, and resilient external position. Our standing as a net energy exporter also provides some buffer against external headwinds. Nevertheless, BNM will remain vigilant to the rapidly evolving nature of this conflict and stand ready to ensure that monetary policy remains supportive of the economy while safeguarding price stability.

 

Notes

^[1] Based on OECD’s ‘The Chip Landscape’ analysis, which indicates that these economies together account for approximately 78% of global in-production wafer capacity as of September 2025.

^[2] Non-E&E products accounted for an average of 64% share of global exports in January to October 2025 (2024: 67%), while E&E goods and commodities accounted for 21% and 15% respectively (2024: 19% and 14% respectively).

^[3] Based on Gartner (2026).

^[4] Refers to Phase 2 of the Public Service Remuneration System (Sistem Saraan Perkhidmatan Awam, SSPA), which is effective in January 2026 with a 7% adjustment (8% adjustment for Phase 1 in December 2024).

^[5] Based on BNM’s Regional Economic & Industry Surveillance team engagements with some major exporters to US and their suppliers between October and November 2025.

^[6] In its Autumn 2025 forecast, the World Semiconductor Trade Statistics (WSTS) projected that the global semiconductor market will grow further by 26.3% in 2026, following the 22.5% growth achieved in 2025.

^[7] Based on BNM’s internal Cash BOP data, data centre exports of services amounted to RM11.7 billion in 2025, significantly higher compared to RM2.8 billion on 2024. Currently, only about 26% of planned data centre capacity has come online, suggesting significant room to further support to services exports as more facilities are completed in the coming years (Source: DC Byte, as of January 2026).

^[8] When civil servant salaries rise, the economic value of government services also grows because these are non-market services and are measured based on their cost of delivery.

^[9] Refer to ‘Estimating Malaysia’s Potential Output’ box article in BNM Annual Report 2012 for more information on the model-driven approaches to assess potential output and the output gap.

^[10] Potential output is derived through an average of several methodologies including Production Function, Laubach-Williams model, Real Business Cycle model, Kalman Filter and Dynamic Stochastic General Equilibrium (DSGE) model.

^[11] The output gap is formally defined as

^[12] Decomposition is undertaken using the production function methodology adapted from The Production Function Methodology for Calculating Potential Growth Rates and Output Gaps (Havik et al., 2014).

^[13] Following the escalation of the conflict, Brent crude oil price increased from USD71 per barrel on 27 February (pre-conflict) to USD77 per barrel on 2 March (first post-conflict trading day). Prices breached USD100 per barrel on 9 March, reflecting over 40% increase nine days since the start of the conflict. Since then, Brent price continues to trade in the USD85 to 105 per barrel range.

^[14] As at 2025, Malaysia’s status as a net energy exporter was mainly driven by sustained trade surpluses in LNG (+RM45.3 billion) and refined petroleum (+RM3.1 billion). This was partly offset by a trade deficit in crude petroleum (-RM29.9 billion).