MORE than three months into the Middle East-inflicted oil shocks and supply chain disruptions, how is the Malaysian economy doing now? How are businesses coping with the cost pressures?
During the initial weeks and months of global oil shocks inflicted by the US-Iran military conflict, business sentiment was badly shaken and immediate concerns were the impact on global energy prices, supply chain disruptions (the shortage of raw materials), logistics costs, and knock-on effects on businesses (via increasing production costs) and households (via consumer inflation).
The economic impacts were highly asymmetric. Rising operational risks hit industries tied to raw material imports, complex supply chains, high transport costs, and consumer-facing markets.
Many industry stakeholders, chambers, and trade groups – through channel checks, ad-hoc surveys, and member feedback – have highlighted major vulnerabilities, including escalating operating costs, cash flow tightness, and supply chain instability.
Energy shock-related disruptions primarily triggered direct cost pressures and broader economic repercussions, creating compounding challenges for both households and businesses.
Some selected industries indicated that raw materials costs have increased significantly by between 10% and 140% during the height of energy price volatility.
Business inventories are estimated to last through May to June, or even into the third quarter of 2026 (3Q26).
While there is no stockout situation, the suppliers do not take larger-than-normal orders, suggesting a wait-and-see approach amid a clearer situation of the supply chain disruptions.
Manufacturers would begin to raise prices once old, cheaper inventory is depleted as they face higher replenishment costs.
The full impact of the cost increases is expected to materialise during the months of June and July, prompting some businesses to raise the prices of their goods.
What does the high-frequency economic data show?
While the economy is seemingly enduring the war shock so far, there is still cautious consumer discretionary spending and a strained business environment.
There is a mixed performance among sectors, featuring a K-shaped recovery – growth differentials between high-technology, export-oriented industries and domestic industries, between large companies and small and medium enterprises (SMEs), as well as between low-to-middle-income and high-income households.
These are the drivers of Malaysia’s economic resilience so far.
Real gross domestic product growth expanded by 5.4% year-on-year (y-o-y) in 1Q26, slowing down from a 6.2% expansion in 4Q25. Consumer spending growth softened to 4.7% in 1Q26 (5.6% in 4Q25) as households felt the pinch of higher living costs. Private investment also paced slower at 7.8% in 1Q26 (9.2% in 4Q25) amid external uncertainties.
The services sector eased to 5.6% in 1Q26 from 6.2% in 4Q25. Manufacturing sector growth was 5.9%, largely supported by export-oriented industries like electrical and electronic (E&E) products.
The latest batch of economic indicators for April to May suggests continued economic growth in 2Q26, estimated between 5% and 5.5%.
Manufacturing and exports were largely boosted by front-loaded activities and orders, the rebuilding of depleted inventory buffers, and hedging against supply disruptions caused by the Middle East conflict.
Export growth remains robust (plus 45.3% y-o-y in May and plus 36.9% in April), primarily propelled by sustained, robust demand for E&E products, semiconductor applications, and the artificial intelligence (AI) tech segment. E&E exports surged by 39.7% from January to May 2026.
Global tech shipments of memory chips and AI-related products are likely to continue growing, although an increasing portion of this export growth stems from price increases rather than volume expansion.
The Industrial Production Index jumped higher (8.2% y-o-y in April versus 4% in 1Q26), with the manufacturing sector accelerating to 8.3% (5.7% in 1Q26).
Export-oriented industries climbed 8.5%, primarily driven by computer, electronic and optical products, as well as coke and refined petroleum products.
Domestic-oriented industries also grew 8% higher, led by the production of motor vehicles, trailers and semi-trailers, along with food processing products.
Nevertheless, the S&P Global Malaysia Manufacturing PMI dipped to 49.9 (signalling a contraction) in May after a strong 51.6 in April.
Manufacturing sales expanded by 9.1% y-o-y in April (5.4% in 1Q26), driven largely by strong external demand for electrical and electronic products and rebounding domestic-oriented industries such as the food and beverages and petroleum sub-sectors.
The wholesale and retail trade sector surged 15.3% y-o-y in April (7.4% in 1Q26), largely due to a 24.1% increase in wholesale trade.
Meanwhile, retail sales slowed further for two consecutive months to 6.3% in April (7.1% in 1Q26), suggesting cautious consumer discretionary spending.
Faced with global supply chain uncertainties and rising costs, retailers and businesses are undertaking precautionary hoarding of inventory, and higher input prices have inflated the wholesale order volume and sales value.
The Malaysia Retail Chain Association and Malaysia Retailers Association have pared down the full-year 2026 retail growth forecast from 4% to 3.8%, reflecting a highly cautious consumer spending landscape and reduced purchasing power.
Retail sales growth of 3.7% in 1Q26 fell short of the initial expectations of 4.4%.
Growth across retail sub-sectors was highly mixed, with subdued or moderate growth in the department stores (plus 0.3%), supermarket and hypermarket sales (plus 1.4%), while specialty stores declined sharply (16.5%) alongside the personal care sector (minus 0.7%).
There are signs of softer hiring momentum, which saw the unemployment rate inch slightly to 3% (affecting 511,800 people) in April from 2.9% in March.
Reported job losses rose to 7,766 employees in May 2026 (7,057 jobs in April), though this has fallen off from the peak of 10,658 in January, largely due to year-end corporate restructuring and downscaling exercises.
While headline employment remains stable, a structural skills mismatch heavily impacts young graduates who are forced to accept jobs below their qualification level.
As of 1Q26, 39.7% of tertiary-educated workers aged 25 to 34 are in jobs below their skill level.
Manufacturing wage growth remained moderate between 1.1% and 1.8% from January to April, lagging behind headline inflation and resulting in negative real wages.
Higher energy price-related costs across global supply chains are severely testing the wholesale and consumer inflation pipeline.
After being caught in price deflation for more than a year, the Producer Price Index reversed to increase by 5.4% y-o-y in April (1.1% in March).
This was driven by a massive spike in energy costs, while embedded distribution costs and rising raw material costs are actively forcing producers to pass operational friction directly onto consumers.
Consumer inflation also picked up from 1.1% y-o-y in February to 2% in May, making it the fastest pace in nearly two years, due to higher food prices and continued price increases in transport, information, and communication.
Amid targeted subsidy programmes for RON95 and diesel that buffer consumers against fuel spikes, headline inflation is expected to move higher in the second half of 2026 (2H26) as businesses pass higher operational costs onto consumers.
The primary driver of a higher headline inflation reading closer to 2.5% in 2H26 will be food prices, due to a probable Super El Nino weather phenomenon that threatens agricultural harvests and supplies.
For now, economic data shows that the domestic economy is so far weathering the oil shock, albeit having a disproportionate impact on some industries, especially micro businesses and SMEs.
While Malaysia can avoid a sharp economic slowdown going into 2H26, there is no room for complacency.
Going into 2H26, restocking activities and inventory accumulation are expected to slow down, as the current surge in wholesale and manufacturing orders is largely a front-loaded response to supply chain risks.
Moving forward, there remain positive drivers and negative drags for the domestic economy.
Firstly, we must stay on high alert regarding the implementation of the US-Iran 60-day memorandum of understanding ceasefire peace deal.
When the global oil supply begins flowing through the Strait of Hormuz, it will take time for it to reach pre-conflict volumes, and it will take even more time to unwind the damage done to global supply chains.
The government has reassured that fuel supplies will remain stable and sufficient until August.
Secondly, US trade frictions remain highly active as it continues to ramp up tariffs and export controls, particularly under the broader Section 301.
These policies target strategic sectors like high-tech industries and manufacturing, aiming to counter unfair global forced labour allegations.
The United States has proposed new tariffs ranging from 10% to 12.5% on imports from 60 economies, including Malaysia over forced labour failures.
President Donald Trump’s latest threat is to place a 100% import tariff on any European country that imposes a tax on digital services from US companies.
Thirdly, there is a high probability that the El Nino phenomenon will strengthen significantly toward end-2026, with an estimated 63% chance of escalating into a “very strong” or potentially “super” El Nino between November 2026 and January 2027.
Since Malaysia is a net importer of food, strong El Nino conditions combined with disruptions to agricultural inputs caused by the Middle East conflict will cause severe food-supply shocks.
Fourthly, global financial market volatility is being triggered by persistent geopolitical risks and the US Federal Reserve’s monetary pivot to tame high inflation risks.
Global equity investors’ strong enthusiasm is increasingly concentrated in technology and AI-related sectors, raising questions about valuation sustainability.
Hence, markets may become more sensitive to earnings disappointments and liquidity shifts as well as waning risk appetite conditions.
Fifthly, consumer sentiment remains highly cautious due to rising inflation risks and the cost of living, with households managing their budgets, and prioritising daily essentials and value-for-money goods over discretionary purchases to stretch their spending power.
Private investment and business spending have indeed turned cautious due to lingering global uncertainties and escalating cost pressures.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
