KUALA LUMPUR: Higher exports of semiconductors and artificial intelligence (AI) edge applications will be among a slew of factors sustaining Malaysia’s economic growth next year at a commendable rate of between 4.0 and 4.5% – against 4.0 to 4.8% this year – despite acute trade challenges, the Ministry of Finance (MoF) said today.
Growth in 2026 would also be a good start for the first year of the 13th Malaysia Plan (13MP) as it would be driven by private and public expenditure including approved investments coming onstream, acceleration of infrastructure projects as well as expansion in the services and manufacturing sectors, the Treasury said.
Next year’s budget, valued at RM419.2 billion from RM421 billion this year with operating expenditure (OE) at RM338.2 billion (RM335 billion in 2025) and development expenditure at RM81 billion (RM86 billion in 2025), would sustain the economy’s growth trajectory.
On the moderate increase in OE, the MoF attributed it to lower subsidy allocation despite an increase in other OE components.
Other positive outcomes anticipated next year is higher Federal Government revenue, unemployment being sustained at 3.0% and the overall fiscal deficit narrowing further, the MoF said in its Economic Outlook 2026 as well as Fiscal Outlook and Federal Government Revenue Estimates 2026 reports released today.
These factors would combine to provide a fillip in sustaining domestic demand and ensuring a moderate external sector performance.
This would be anchored by private consumption, boosted by salary adjustments under phase 2 of the Public Service Remuneration System (SSPA), targeted assistance programmes and robust tourism activities.
The MoF said Budget 2026 would serve as a strategic policy instrument for the 13MP to sustain economic momentum, strengthen fiscal resilience and bridge structural gaps.
It will focus on three thrusts guided by the MADANI Economy framework, namely, ‘administration and governance’ to be operationalised by results-based budgeting and institutionalising best practices, ‘raising the ceiling’ of national potential via high-growth high-value industries, and ‘raising the floor’ of living standards through labour market reforms.
These measures under Prime Minister Datuk Seri Anwar Ibrahim’s administration would undoubtedly provide Malaysia’s populace of 35.56 million a standard of living comparably much higher than many other nations.
An encouraging note was a possible boost in the ringgit as two more interest rate cuts by the US Federal Reserve are anticipated towards the end of this year after it cut rates on Sept 16 by 25 basis points, bringing the funds rate to 4.0-4.25%.
The MoF said the local currency stands among the region’s most resilient currencies, appreciating by 6.3% (RM4.2070) against the US dollar as at end-September 2025. It is currently trading at 4.21 to the greenback.
As for the prognosis for the stock market, the ministry said its recent rebound was due to increased investor confidence, anticipation of US Fed rate cuts and solid domestic economic performance. It added that the bourse persevered amid global market uncertainties.
Malaysia’s economic expansion aside, the MoF nevertheless cautioned against downside risks, foremost of which are uncertain trade policies including the threat of sectoral tariffs from the United States, supply chain disruptions as well as volatility in global trade due to protectionist tendencies which diminishes the rules-based world trading order.
The MoF contended that the operating expenditure would improve efficiency in public spending through reprioritisation and targeted distribution of fiscal resources.
As for the Federal Government, its total revenue for 2026 is estimated to be higher at RM343.1 billion (2025: RM334.1 billion), driven by an improvement in both direct and indirect tax collection.
Another piece of good news is that the overall fiscal deficit is projected to narrow to 3.5% of gross domestic product (GDP) in 2026 (2025: 3.8%).
Economic Prospects
Elaborating on Malaysia’s economic prospects, the MoF said the services sector is projected to grow by 5.2% in 2026, with all subsectors contributing to the expansion.
This growth will be led by increased tourism activities, driven by a surge in visitor arrivals and spending related to Visit Malaysia Year 2026, alongside sustained consumer spending.
Growth in the manufacturing sector is projected to remain steady at 3.0% in 2026, supported by both export- and domestic-oriented industries.
The broader gains from the global technology upcycle are anticipated to continue supporting export-oriented industries.
Domestic-oriented industries, meanwhile, will be supported by higher output, attributed to stable investment and consumption activities as well as concerted government efforts to boost local production.
The agriculture sector is set to grow by 2.2% next year versus 1.2% in 2025 while the mining and quarrying sector is projected to ease by 1.0% from a 1.1% growth this year.
Meanwhile, the construction sector is expected to expand slower in 2026 at 6.1% from 10.1% in 2025, and the services sector is set to inch up by 5.2% from 5.1%.
Currently ranked 36th globally with a GDP of US$422 billion, Malaysia is on the path to becoming one of the top 30 largest economies, something attainable if the rakyat pull together in the same direction and with greater industriousness.
Headline Inflation
Headline inflation is projected to range between 1.3 and 2.0% in 2026, reflecting a continued environment of manageable price growth.
“The outlook is shaped by steady domestic demand, stable labour market conditions as well as policies that support household purchasing power and market stability.
“Price pressures are anticipated to remain contained, supported by ongoing improvements in supply chains and productivity, with producer-price movements gradually passing through to consumers,” the MoF said.
According to the Economic Outlook 2026 report, risks to the outlook are broadly balanced with upside risks including potential adjustments to domestically administered prices or higher global commodities.
However, a stable ringgit, ongoing policy measures and any further easing in global food and energy prices would temper inflation, it added.
Labour Market
As for the unemployment rate, it is anticipated to remain at 3.0% in 2026, the MoF said.
Total employment is projected to expand by 2.3% to 17.2 million persons, driven largely by job creation in the services and manufacturing sectors, which are expected to continue accounting for over 80% of total employment.
It said the number of low-skilled foreign workers is expected to decline in 2026, attributed to the strict approval of foreign worker quota applications on a case-by-case basis for specific approved sectors such as agriculture, construction and certain service industries.
The MoF also said that financial reforms are well underway, further bolstering fiscal sustainability.
As for upcoming initiatives towards further reform, it said it will include medium-term revenue strategy (MTRS) encompassing minimising revenue leakage and broadening the tax base.
It also includes the introduction of expenditure optimisation measures including eCOSS or electronic cooking oil subsidy system.
Global Economic Outlook
As for the global outlook, the MoF said GDP growth is projected at 3.0% in 2025 and 3.1% in 2026, contributed by stronger trade activity in the first half of 2025, easing global financial conditions and targeted fiscal measures in several large economies.
Global trade is forecast to expand 2.6% in 2025 before slowing to 1.9% in 2026, as the boost from front-loading fades, while global inflation is projected to continue its downward trajectory, averaging 4.2% in 2025 and 3.6% in 2026.
“Risks to the global outlook in 2026 remain tilted to the downside. These include renewed tariff escalations, geopolitical disruptions in energy and trade flows, persistent fiscal imbalances and heightened volatility in global finances,” the MoF said. – Bernama
