PETALING JAYA: Domestic demand will continue to anchor Malaysia’s economic growth, backed by firm labour market conditions, rising household incomes and continued targeted aid.
Kenanga Investment Bank Bhd (Kenanga IB) said the services sector, particularly tourism, should deliver a strong uplift as capacity ramps up under Visit Malaysia 2026.
The bank said investment momentum should remain solid, driven by project rollouts of key national frameworks, including the New Industrial Master Plan 2030, National Energy Transition Roadmap, National Semiconductor Strategy, AI Nation Framework and 13th Malaysia Plan.
It expects this to offset external trade-related pressures when combined with public infrastructure spending.
Kenanga IB said the overall risk balance appears manageable.
“Domestic buffers are firm as the economy shifts towards internal drivers. Exposure to external shocks remains, but the impact of US tariffs has so far been limited, supported by strong global electrical and electronics demand driven by the ongoing tech upcycle.
“That said, geopolitical tensions, shifts in US policy direction and global market volatility remain key downside risks. Still, expected global monetary easing in 2026 and earlier rate cuts should filter into the real economy and support demand,“ the investment bank said.
Malaysia’s gross domestic product (GDP) growth accelerated to 6.3% year-on-year in Q4 2025, beating Bloomberg consensus and Department of Statistics Malaysia’s advance estimate of 5.7%, as well as Kenanga IB’s forecast of 5.5%, lifting full-year 2025 GDP growth to 5.2%, above both Kenanga IB’s forecast and consensus of 4.9%.
The upside surprise was mainly driven by stronger services and manufacturing activity, along with firm consumption and investment, while net exports remained a drag due to elevated imports.
However, on a seasonally adjusted basis, quarter-on-quarter growth moderated to 0.8% (Q3 2025: 2.7%), and within Asean-5 plus Vietnam, Malaysia posted the third-highest growth behind Vietnam (8.5%) and Singapore (6.9%), outperforming Indonesia (5.4%) and the Philippines (3%), Kenanga IB said.
Domestic demand strengthened in Q4 2025, supported by firmer consumption and investment, with growth accelerating to 6.6% (Q3 2025: 5.8%) and contributing 6.3 ppts to overall GDP expansion.
Both public and private spending improved, led by higher public investment and steady private consumption, helping to cushion the drag from weaker external trade.
However, net exports deteriorated sharply as imports outpaced exports, subtracting 2.3 ppts from growth.
Sectoral performance remained broad-based, led by services and manufacturing, while construction stayed resilient and agriculture rebounded strongly; in contrast, mining activity slowed significantly, weighing on overall output.
“We maintain our 2026 GDP growth forecast at 4.5%, with upside potential towards 5.0% if current momentum holds.
“Stable domestic conditions, resilient service activity, and ongoing investment realisation should continue to support growth prospects. External headwinds persist, but Malaysia’s diversified export base and policy push for industrial upgrading should cushion downside risks.
“The export outlook is likely to stay mixed. Semiconductor-related shipments should remain firm, supported by steady global demand and continued exemption from higher US tariffs. Broader trade flows may remain volatile due to currency movements, geopolitical risks, and commodity price fluctuations.
“Despite external risks, domestic fundamentals and policy support keep the growth outlook intact,“ Kenanga IB said.
The investment bank said Bank Negara Malaysia’s (BNM) Overnight Policy Rate (OPR) is expected to remain at 2.75% through 2026, prioritising stability amid steady domestic demand and contained inflation.
“We expect the monetary stance to remain steady through 2026. The current OPR level continues to balance support for domestic growth with price stability.
“Policymakers are likely to stay cautious and data-dependent, monitoring US policy development, tariff-related effects, and the pass-through of subsidy rationalisation and wage measures. A status quo path remains most likely unless a major global shock hits,“ Kenanga IB said.
It noted that the current OPR remains accommodative, as it’s already below pre-Covid levels.
“It should continue to support domestic expansion amid global uncertainty. Against this backdrop, we expect BNM to maintain a steady policy stance through 2026 while supporting Malaysia’s ongoing economic transformation,“ Kenanga IB said.
