Market Update: Malaysia’s economy expands 5.2% in 2025 – Full Analysis

[KUALA LUMPUR] Malaysia’s economy expanded 5.2 per cent year on year in 2025, exceeding the government’s official forecast of 4 to 4.8 per cent, Bank Negara Malaysia said on Friday (Feb 13).

The growth was the strongest full-year performance since 2022, when gross domestic product rose 8.7 per cent. It was also slightly higher than the 5.1 per cent recorded in 2024.

In the fourth quarter, the economy grew 6.3 per cent from the year before. It was the fastest pace in three years, surpassing the 5.7 per cent forecast by economists polled by Reuters.

Meanwhile, third-quarter growth was revised up to 5.4 per cent from 5.2 per cent.

Bank Negara governor Abdul Rasheed Ghaffour attributed the expansion to resilient domestic demand and firmer exports.

“Growth momentum is expected to continue in 2026, supported by resilient domestic demand and exports,” he said.

Household spending strengthened on the back of favourable labour market conditions, wage growth and income-related policy support.

Investment remained robust, driven by higher machinery and equipment spending, in particular for data centres, and continued implementation of multi-year projects in both the private and public sectors.

On the external front, exports were led by stronger shipments of electrical and electronics goods. Services exports also grew, supported by inbound tourism and information communication technology-related services, contributing to a surplus in the current account.

Bank Negara noted that imports stayed firm, reflecting higher intermediate goods to support production and capital goods linked to ongoing investment projects.

Growth for 2026 projected at 4 to 4.5%

Looking ahead, the government and central bank project growth of between 4 and 4.5 per cent in 2026, amid lingering uncertainty over US trade policy.

Malaysia currently faces a 19 per cent levy on goods exported to the United States. The central bank kept its benchmark overnight policy rate unchanged at 2.75 per cent at its first policy meeting of 2026, citing steady growth, modest inflation and a positive outlook.

Bank Negara last reduced the policy rate in July 2025 in a pre-emptive move following tariff announcements by US President Donald Trump. Since then, trade-related uncertainty has eased and Malaysia’s tariff rate has been adjusted to levels broadly in line with those of its regional peers.

Headline and core inflation averaged 1.4 per cent and 2 per cent, respectively, in 2025, and are expected to remain moderate this year.

The central bank said: “The domestic policy reforms implemented last year, such as the sales and service tax expansion and targeted fuel subsidy rationalisation, are projected to result in only modest effects on inflation in 2026.”

In a note on Friday, MBSB Research observed that while external trade performance, driven by front-loading activities, remains encouraging, surging imports will likely cap the net contribution to GDP.

The firm also noted that moderate growth in construction and mining output further limits potential upside.

In the short term, MBSB Research anticipates more moderate GDP growth in early 2026 due to the high base effect and tapering trade activity.

“We maintain a cautious outlook as sentiment and activities could be affected by heightened geopolitical risks, while potential trade barriers pose a significant threat to the stability of global trade and supply chain activities,” said the research house.

OCBC senior Asean economist Lavanya Venkateswaran has raised Malaysia’s 2026 GDP growth forecast to 4.4 per cent from 3.8 per cent.

This upgrade stems from a technology export upcycle and domestic reforms boosting investment, despite growth trailing 2025 levels.

Notably, recent US semiconductor tariffs proved narrower than feared, affecting less than 10 per cent of related exports.

Consequently, Venkateswaran said the need for monetary support has eased and OCBC now expects Bank Negara to maintain the policy rate at 2.75 per cent throughout 2026.

Ringgit’s double-digit gains

The ringgit strengthened during the year, appreciating 10.2 per cent against the US dollar and 6.3 per cent on a nominal effective exchange rate (NEER) basis.

In the fourth quarter alone, the currency gained 3.9 per cent against the US dollar and 3.8 per cent against major trading partner currencies.

The appreciation was supported by narrowing interest-rate differentials following US Federal Reserve rate cuts, easing tariff-related uncertainty, and Malaysia’s improving economic outlook.

“Resilient domestic fundamentals are expected to provide enduring support to the ringgit,” Bank Negara said.

As at Friday noon, the ringgit was trading at 3.8962 against the greenback, nearly 13 per cent higher than 4.4708 the year before. Against the Singdollar, the Malaysian currency traded at 3.0824, appreciated 6.7 per cent from 3.3048 the year before.

UOB senior economist Julia Goh and economist Loke Siew Ting said the ringgit was among Asia’s strongest currencies through 2025 and into early 2026, driven largely by broad US dollar weakness.

“Malaysia’s domestic fundamentals – including firm growth momentum, resilient domestic demand, disciplined macro policy and strong capital inflows – provided additional support,” they said in a report.

The ringgit is expected to firm up against the US dollar, hitting 3.90 in the second quarter of 2026, and then close the year at 3.85, UOB has predicted.

While a stronger ringgit would help moderate import costs and contain headline and core inflation, Goh and Loke cautioned that it could weigh on export competitiveness and tourism receipts, potentially narrowing Malaysia’s current account surplus.