PETALING JAYA: Local economists are keeping a cautious outlook on Malaysia’s growth prospects for this year and 2027, despite the International Monetary Fund’s (IMF) generous upgrade of the country’s 2026 gross domestic product (GDP) projection to 4.7%.
In its latest World Economic Outlook report released on Tuesday, the fund notably improved its GDP expansion forecast for Malaysia by 0.4 percentage points from its last prediction in January, although it had in the same note turned bearish on the global economy by downgrading its growth expectations.
The IMF’s report pointed out that the Middle East conflict has already halted late-2025 economic momentum, leaving the world economy drifting toward an “adverse scenario” even before any escalation.
Senior economist at United Overseas Bank Julia Goh observed that the upgrade for Malaysia’s growth still falls within Bank Negara Malaysia’s (BNM) wider forecast range of 4% to 5%.
Citing the IMF that artificial intelligence (AI)-related growth could contribute 0.1 percentage points to global GDP expansion, she told StarBiz: “Given Malaysia’s exposure to AI through its established position in the global value chain for semiconductors, as well as growing investments in digital services and data centres, we would connect Malaysia’s upgrade to that part of the story.”
Another important factor, she said, is that Malaysia is relatively more cushioned from the effects of the Middle East conflict as a net energy exporter, while targeted subsidies as well as fiscal assistance is in place to support the domestic economy.
Crucially however, Goh believes that despite there being hopes of an extended ceasefire and a climb down of risks at this stage of the conflict, the damage to oil and gas flows and energy sufficiency in Asia is significant, coupled with the spike in energy costs and global supply chain disruptions. Hence, while the outlook for Malaysia still looks neutral to positive, the growth risks are tilted more to the downside,” she cautioned.
Economics professor at Sunway University Dr Yeah Kim Leng opined that Malaysia’s strong role in global semiconductor and related exports, which are relatively less affected by energy shocks, could be a contributor to its IMF growth forecast upgrade.
In addition, he said a stable labour market, along with low unemployment and a healthy financial system also provide an additional layer of support for the economy to cushion the fall in external demand, particularly if the Chinese and European economies were to weaken further amid the global slowdown.
That said, dark clouds continue to loom over the horizon, particularly since there has not been a solid end to the war in Iran, with Yeah telling StarBiz: “If a prolonged conflict pushes oil prices sustainably above US$100 to US$110 per barrel, BNM would be confronted with a classic yet difficult dilemma on how to support the domestic economy slowing under cost shocks without letting imported inflation becoming entrenched.”
In such a supply-driven scenario, he explained that aggressive interest rate hikes would risk deepening the output contraction, while doing little to address the root cause which is energy shortages and higher import bills.
Yeah warned that this raises the spectre of stagflation, where growth stagnates even as prices rise, and a key challenge is to distinguish temporary and persistent shocks.
“If the oil price spike is expected to be short-lived, fiscal tools such as targeted subsidies, temporary import duty reductions, soft loans, and credit guarantees for affected businesses would be more effective than monetary tightening.
“However, if second-round effects emerge such as broad-based wage or price increases that could undo inflation expectations, then a modest and pre-emptive rate hike, even at some cost to near-term growth, may be necessary to signal credibility and prevent a wage-price spiral,” he elaborated.
He added that a sharper global slowdown would hit Malaysia hardest through the trade channel, given that exports make up nearly 70% of the country’s GDP.
Yeah pointed out that electrical and electronics (E&E) products, particularly semiconductors, are most exposed to falling demand from key partners like China and the United States, before also pointing out that energy prices are another major channel.
“While high oil prices benefit Malaysia, it could lead to a global downturn that in turn will drive crude prices lower, squeezing government revenue.
“Financial conditions, through portfolio outflows and ringgit weakness, could add further downward pressure on growth. Tourism could play a positive role during the current Visit Malaysia Year 2026 but only when flight disruptions and high ticket prices caused by the ongoing Middle East crisis ease,” he said.
Yeah said the most vulnerable sectors are export-oriented manufacturing, including electronics, petrochemicals, and rubber gloves. Wholesale, transport, and logistics would suffer indirectly from lower activity.
In contrast, he is confident that domestically focused services such as telecommunications, utilities, healthcare, and education are best positioned to withstand shocks from the Middle East conflict, as they rely less on foreign demand.
In line with the prudent mood, economist and investment strategist at IPP Global Wealth Mohd Sedek Jantan remarked that Malaysia’s growth outlook remains sustainable “only conditionally”, and within a narrower margin of outperformance, given the economy’s continued exposure to global trade.
He said this is particularly relevant as China and the United States together account for roughly 40% of global GDP, meaning any synchronised slowdown across these two economies would inevitably transmit through global trade and manufacturing cycles.
Having said that, he noted that the key shift is that Malaysia is no longer operating as a pure trade proxy, but is increasingly characterised by a twin-engine growth structure, where external demand is complemented by a more potent and better-transmitted domestic cycle.
“This reflects a re-weighting rather than a decoupling of Malaysia’s growth function. In our analysis, where GDP was revised to 4.6% (from 4.5% previously), the upgrade was driven primarily by stronger domestic transmission efficiency, not by any improvement in global trade conditions,” he explained.
Consumption, public spending and investment are now moving more synchronously, while the investment cycle is generating a pipeline effect that sustains growth independently of contemporaneous export demand.
However, this does not eliminate external constraints, as Mohd Sedek said Malaysia’s growth remains sensitive to global conditions, and a sharper slowdown would still pull expansion towards the 4% range.
If global growth weakens sharply, he believes Malaysia will feel it first and most clearly through trade, followed by financial conditions, with energy prices and tourism playing secondary roles.
Echoing Yeah’s view, he said Malaysia’s trade channel remains the dominant transmission mechanism, particularly through E&E and intermediate goods linked to China and advanced economies. A slowdown there feeds directly into export volumes and industrial production.
“But what often matters just as much is the financial channel, where tighter global liquidity, currency pressure and capital flow volatility amplify the shock by raising the cost of capital and weighing on investment sentiment.
“Trade hits first, but financial conditions determine how deep the slowdown becomes,” said Mohd Sedek.
