PETALING JAYA: 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.
World Bank lead economist for Malaysia, Dr Apurva Sanghi, said he does not expect an increase in growth next year as “momentum has slowed”.
He projected real gross domestic product (GDP) growth of 4.1% year-on-year in 2026, the same pace forecast for 2025.
“Malaysia’s high degree of openness means weaker global growth is quickly transmitted through financial, investment, trade and tourism channels, and global and regional forecasts are not that rosy.
“Specifically, we found that 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,” he said at a briefing on Part 1 of the Malaysia Economic Monitor yesterday.
Apurva noted that 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, he said domestic demand – the main driver of growth in 2025 – is also slowing. He expects it to ease from 5.2% this year to 4.7% in 2026, adding that while it will still support growth, “its contribution is declining”.
“The biggest contributor to domestic demand is private consumption, which is expected to slow from 5% this year to 4.9% in 2026.
“Looking at the bigger picture, both private consumption and investment – the two main growth drivers in Malaysia – are expected to slow down.
“Private consumption’s contribution to real GDP growth is now lower in the post-pandemic period than it was before. The same applies to investment,” he said.
Apurva further cautioned that business confidence is low heading into 2026, as reflected in the downward trend of the Purchasing Managers’ Index and RAM Business Confidence Index.
“Firms are adopting a wait-and-see approach, either delaying or scaling back capital expenditures. We expect gross fixed capital formation – which is investment – to slow from 7.2% this year to 4.7% next year,” he said.
Apurva added that Malaysia continues to grapple with tariff-related uncertainties.
He said measures to cushion industries affected by the US tariffs are the most pressing short-term priority that needs to be addressed in the upcoming Budget 2026.
“The situation is so volatile, it is difficult to plan for. Just last week, there were tariffs announced on the furniture sector.
“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,” he said.
Apurva highlighted that the electrical and electronics (E&E) industry – the country’s “golden goose” – is particularly at risk, despite current tariff exemptions.
“Will tariffs on semiconductor imports be 100%, as announced by the United States? Or will there be exemptions for US companies? We do not know,” he said.
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, Apurva pointed out.
“For Malaysia, it is worth noting that China is the single largest supplier in the computer and electronics category. About 12% of Malaysia’s E&E value-added is tied to Chinese E&E exports.
“If the most stringent origin rules are applied, it could lead to reduced imports from China,” he explained.
Apurva added that while Malaysia has benefitted from trade relocation out of China, countries like Vietnam and Thailand have gained even more. The relatively smaller short-term gains in Malaysia’s E&E exports reflect deeper, long-term structural risks facing the sector, he said.
These risks include Malaysia’s shrinking share in the production of advanced integrated chips, as global demand shifts toward artificial intelligence-related chips – such as graphics processing units and random access memory – areas dominated by Taiwan, South Korea, and Israel.
“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,” Apurva said.
Looking ahead to Budget 2026, which will be tabled on Friday, Apurva emphasised the importance of strengthening government revenue mobilisation efforts.
He noted the country’s revenue has been on a decline from 2012 to 2025, representing one of the steepest declines globally.
“Current measures, like expanding the sales and service tax (SST) base and tightening tax compliance, have been reasonably successful. However, these measures will soon run into diminishing returns.
“In the case of SST, there will be fewer and fewer people that can be brought into the tax net.”
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,” he highlighted, adding that 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.
