ECONOMIC growth remains imperative for socio-economic development, narrowing income inequality and lifting living standards.
Without sustaining and growing the economy, the government cannot respond to the needs of its people and businesses, and more crucially, to the challenges of the world’s growing complexities.
For growth to be sustained and inclusive, its benefits must reach all people.
However, there is a growing reality of an increasing disconnect between economic growth and the people feeling good effects.
Malaysia’s growth paradox is striking.
The economy has been growing by 5.2% per annum (pa) in 2021 to 2025, strengthening labour market conditions (unemployment rate improved to 2.9% in the first quarter of financial year 2026 or 1Q26 from 4.5% at end-Dec 2020), and manageable inflation (2.3% pa in 2021 to 2025).
The Malaysian household incomes have noticeably improved, with the national median monthly household income rising to RM7,017 in 2024, an increase of 4.4% pa from RM4,585 in 2004, and the average (mean) household income increased by 4.1% pa to RM9,155 per month in 2024 from RM6,141 in 2004.
While absolute earnings have grown, persistent living costs and inflation continue to weigh heavily on everyday purchasing power.
This creates the “gross domestic product (GDP) disconnect”, where there is growing divergence between strong headline economic growth and personal financial reality experienced by average joe, especially low- and middle-income households and small businesses.
People do not feel the benefits of economic growth, often described as a ‘purchasing power paradox’, as nominal wage growth often lags behind the rising cost of living.
Real median monthly salaries and wages slowed from 4.2% pa in 2011 to 2019 to 0.9% pa in 2020 to 2024, as wages failed to keep pace with prices of goods and services.
In 2020 to 2024, food prices increased 3.3% pa, transport (3.6% pa), restaurants and accommodation services (3.4% pa) and rent and utilities (1.9% pa).
The financial squeeze is particularly acute in urban cities/centres like the Klang Valley, Penang, and Johor Baru, where housing, transportation, and daily expenses constitute a large proportion of the middle- and lower-income households’ monthly budget.
In 2024, the bottom 40 or B40 households spent 72.5% of their total budget toward four core spending segments: housing and utilities (25.2%), food and beverages (22%), restaurants and accommodation services (15.3%), and transportation (10%).
The middle 40 or M40 households spent 67.4% of their total budget on housing and utilities (22.7%), restaurant and accommodation services (17.9%), food and beverages (16.2%) and transport (10.6%).
Escalating living costs also exerted financial burden pressure on B40 and M40 households, with inflation and stagnant or moderate growth in wages frequently outpacing disposable income.
This squeeze is compounded by fixed financial commitments like housing and car loans, medical insurance, and personal debt.
The middle-income households (3.28 million households, or about 37% of the total population in 2024 vs 3.16 million households in 2022; 2.78 million in 2016) face a systemic economic pressure and are caught in the “sandwich” effect – financially squeezed between supporting parental care and raising children, making them highly vulnerable to the rising cost of living, unexpected expenses and income as well as employment shocks.
The targeted assistance programmes such as Sumbangan Tunai Rahmah are primarily focused on the B40 income tier, often leaving the squeezed middle-income households to absorb the financial shock independently.
The disparity between believing the economy is doing well and what the people feel better about in the economy reflects the reality of a K-shaped economy.
A K-shaped economy describes different parts of the economy moving in opposite directions at the same time.
At the upper arm of the K-shape, some sectors and companies (technology, software, artificial intelligence or AI, semiconductor, and financial services), and households (high-income and high-skilled professionals) have benefitted and grown, while at the lower arm, sectors (hospitality, travel and leisure as well as small and medium enterprises or SMEs) continued to weaken or grow unevenly, and the workforce (low- and semi-skilled gig workers) continued to fall further behind.
This segment of households faces financial pressure due to their wages lagging behind rising costs and inadequate savings and has high economic exposure to consumer inflation, the rising cost of living and debt.
Skill-related underemployment remains a persistent structural issue, with over 1.9 million tertiary-educated workers stuck in semi-skilled or low-skilled jobs.
While the rate has slightly declined to 35.8% in the 4Q24 and 35.2% in 1Q26 (37.4% in 2020 to 2023) due to a rapidly expanding workforce, the absolute number of affected individuals continues to trend upward.
Skills-related underemployment is highest among younger workers.
As of 1Q26, 39.7% of tertiary-educated workers aged 25 to 34 are in jobs below their skill level.
SMEs often experience a “resilience divide”, where broader economic growth is offset by escalating localised costs.
They face constraints to absorb market volatility due to the lack of financial reserves and disproportionate access to financing, face pressures from compressed profit margins, increasing operational costs and lagging digitalisation, technology adoption and automation as well as environmental, social and governance integration.
Actionable and effective strategies are needed to translate macroeconomic growth into tangible benefits for the people and SMEs.
For businesses, maintain a supportive business ecosystem centred on simple regulation, lower compliance costs, streamlined business registration, minimised red tape, digitised public services, and targeted financial incentives.
Policy interventions are needed to address the “Missing Middle”, catering to the middle-income households and wage earners that are financially squeezed and to the SMEs, including mid-tier companies – too large for micro-grants and financing but too small to leverage economies of scale or influence policy.
Bring the people and households that have been lagging behind back onto the economic growth ladder.
Many vulnerable low-income and middle-income households are stuck in income and wage stagnation, while debilitating debt burdens and limited access to finance are pushing these groups further behind those with better financial management.
While Malaysia’s Compensation of Employees to GDP ratio was estimated at 34.4% in 2025 (33.6% in 2024), it remains below the Thirteenth Malaysia Plan’s target ratio of 40% by 2030. This requires implementing productivity-linked wages, shifting to high-value industries that generate high revenue per employee, and broadening upskilling and reskilling as well as vocational training through technical and vocational education and training.
Incentivise companies to invest in reskilling initiatives.
Policymakers must prepare to manage the social and economic consequences of demographic and technology shifts, such as the impact of digitalisation, AI and automation on the labour market dynamics, in terms of the education and training demands of the workforce and the welfare of displaced individuals and retirees.
Good planning and execution of sustainable and inclusive policies are crucial for empowering individuals and unlocking the benefits of economic growth.
Strengthen the social protection system not only to support the lower-income households but also the vulnerable middle-income households.
Public spending must redirect away from ultra-populist programmes toward high-value employment pathways and income-enhancing investments.
With Malaysia already having become an ageing nation in 2021, with the proportion of those aged 65 and above reaching 7% of the total population, and being projected to become an “aged nation” by 2048, when the proportion reaches 14% of the total population, expanding a robust social protection system is critical to provide financial security (ensuring a dignified retirement for older persons), affordable and better healthcare, reduce caregiver burdens, and provide long-term care.
The growth paradox, where strong headline macroeconomic indicators mask a headline-versus-reality disconnect is not an economic nemesis.
It has become clear that GDP growth alone is no longer a sufficient measure of success.
The real test is to ensure the economic growth generated produces prosperity that is broad-based, durable, and genuinely shared.
Policymakers have to reconceptualise the growth through transformative strategies to ensure economic growth reaches the broader population.
These involve linking macro-level GDP gains with household prosperity through deliberate fiscal and structural policies like real income enhancement, upskilling and reskilling workers, investing in community infrastructure (public transportation, affordable housing, and digital connectivity) and implementing progressive taxation, ensuring those at the bottom of the income scale directly benefit from national wealth generation.
