Best growth of 2026 could already be behind Malaysia, BMI predicts

KUALA LUMPUR, May 19 — Malaysia’s economic growth likely peaked in the first quarter of 2026 and is expected to slow down for the rest of the year, as geopolitical tensions and weakening global demand cast a shadow over the nation’s outlook, according to a new report by BMI.

The country’s real GDP grew 5.4 per cent year-on-year in the first quarter, a moderation from the 6.3 per cent recorded in Q4 2025, according to data from the Department of Statistics.

The figure was largely in line with market expectations. However, on a seasonally-adjusted basis, the economy showed no growth from the previous quarter, indicating a loss of momentum.

BMI, a FitchSolutions company, is maintaining its full-year growth forecast for Malaysia at 4.3 per cent for 2026, citing a build-up of external and domestic risks that limit the potential for a stronger performance.

The firm noted that private consumption was once again the main engine of growth in Q1, and said this may not be sustainable.

BMI warned that an ongoing US-Iran conflict could push inflation beyond the central bank’s target range of 1.5–2.5 per cent, eroding consumer purchasing power.

Adding to the pressure is the potential restructuring of fuel subsidies targeting higher-income households. BMI noted that if this policy is implemented, it could dampen consumer sentiment and reduce spending among a group that accounts for a significant share of domestic consumption.

Investment and exports face headwinds

Business investment is already showing signs of strain. Direct investment fell sharply to RM14.7 billion in Q1 2026, down from RM46.0 billion in the previous quarter.

BMI expects that a more cautious US Federal Reserve could lead investors to delay capital commitments, with the full impact becoming clearer in the second quarter.

On the trade front, while electrical and electronics (E&E) exports are expected to remain resilient due to global demand for AI infrastructure, non-E&E exports are likely to stay sluggish as growth slows among Malaysia’s key trading partners.

Reflecting this, BMI has cut its global growth forecast for 2026 to 2.4 per cent. The United States, a key market for Malaysia, is now projected to grow by only 2.0 per cent, removing a key source of support that boosted Malaysian exports last year.

BMI described the risks to its 4.3 per cent growth forecast as balanced. A major escalation in the Middle East could drive oil prices above US$90 per barrel, fuelling inflation.

On the upside, a prolonged AI investment boom could significantly strengthen Malaysia’s trade performance, while a faster-than-expected rollout of major projects could also provide a lift to the economy.