World Bank Predicts Restrained 4.1% Growth for Malaysia in 2026
Malaysia’s economic growth is projected to stabilize at 4.1 per cent in 2026, maintaining the same forecast level as 2025, according to the World Bank.
Dr. Apurva Sanghi, the lead economist for Malaysia at the World Bank, indicated that the nation’s growth momentum is expected to slow, suggesting that 2026 will be a somewhat restrained year as both external and domestic factors are likely to cap the pace of economic expansion.
He highlighted that “Global and regional forecasts are not that rosy,” and specifically pointed out that Malaysia’s economy is highly sensitive to economic changes occurring in the United States (US) and China, its two largest trading partners.
This forecast was delivered during a media briefing for the launch of the World Bank’s October 2025 East Asia and Pacific Economic Update.
Apurva explained that the primary engine of Malaysia’s economic growth will predominantly be private consumption, which is expected to be buoyed by ongoing wage increases, targeted government transfers, and a continued accommodative monetary policy stance by the central bank.
Elaborating on the sensitivity to its key trade partners, he provided a quantitative assessment: a one percentage point reduction in US growth is estimated to reduce Malaysia’s overall growth by a substantial 0.8 percentage points.
Similarly, a one percentage point decline in China’s growth is projected to reduce Malaysia’s growth by about 0.45 percentage points, demonstrating the outsized impact of the US economy on Malaysian trade, even though both major powers are critically important moderating factors.
Domestic Uncertainty and Global Trade Challenges
Beyond external influences, the World Bank noted that domestic demand and general confidence among Malaysian households and firms have also subsided, primarily due to prevailing uncertainty.
This decline in domestic sentiment is clearly illustrated by business sentiment indicators such as the RAM Index and the Purchasing Managers’ Index (PMI).
Firms are observed to have largely adopted a “wait-and-see attitude” until various uncertainties are resolved, including the current tariff uncertainties and other general business risks.
Apurva stated that there is an overall general decline in both business and consumer sentiment, which is stemming from the spillover effects of these unresolved uncertainties. The hesitation to commit to major investments or spending spree is directly contributing to the constrained growth forecast of 4.1 per cent.
In terms of global trade and technological challenges, the World Bank cautioned that Malaysia’s crucial Electrical and Electronic (E&E) sector, which is a major export earner, could face a risk of losing ground in the production of advanced semiconductors.
This is particularly true in the fast-growing segment of Artificial Intelligence (AI)-related chips, a market that is currently heavily dominated by major players like Taiwan and South Korea.
For 2026, the forecast suggests flat growth in exports for Malaysia, projected at 2.9 per cent, while growth in imports is expected to decrease to 3.7 per cent from the previous 4.5 per cent.
This subdued trade outlook reinforces the need for structural reforms to boost competitiveness and diversify high-tech production, a key recommendation from the World Bank team.
Fiscal Consolidation and Structural Reforms Imperatives
The World Bank analysis also strongly highlighted that addressing domestic fiscal challenges and implementing deep structural reforms are essential for placing Malaysia’s economic future on a more sustainable and dynamic path.
Apurva noted that low research and development (R&D) spending and limited local innovation pose a significant challenge that must be immediately addressed, pointing out that Malaysians file only 13 to 18 per cent of patents locally.
This lack of innovation is a long-term drag on productivity and high-value economic activity.
Furthermore, he stated that further fiscal consolidation efforts are absolutely required to place the nation’s debt on a sustainable trajectory, given that the debt-to-Gross Domestic Product (GDP) ratio currently stands at 64 per cent.
He reminded policymakers that the Fiscal Responsibility Act (FRA) mandates that the debt ceiling of 60 per cent must be reached within the next three to five years, demanding urgent action.
To achieve this goal, the World Bank recommends a need for stronger revenue mobilization that must go beyond simply tweaking the Sales and Service Tax (SST) and improving tax compliance, as “you cannot keep on increasing the SST rate or the scope.” Malaysia should explore broader revenue streams.
Additionally, the nation should liberalize trade beyond the US to all partners, effectively leverage the growth linkages within the ASEAN region, and reduce restrictive barriers in services trade.
Firm-level reforms, according to the World Bank, should specifically focus on improving the business environment, reducing corruption in the permitting processes, and ensuring a level playing field in competition between the formal and informal sectors.
The next phase of Malaysia’s economic story, Apurva concluded, fundamentally hinges on significant gains in productivity, a commitment to innovation, and deeper regional and global integration.
