Malaysia economy expands 5.4% in Q1 as Bank Negara warns of tougher outlook
The governor says the country enters a tougher global environment from a ‘position of strength’
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[KUALA LUMPUR] Malaysia’s economy expanded 5.4 per cent in the first quarter of 2026, marginally exceeding forecasts despite mounting headwinds. Bank Negara cautioned that the country is entering a more challenging global environment “from a position of strength”.
The final figure was slightly higher than the 5.3 per cent growth forecast in a recent Reuters poll, though it represented a slowdown from the 6.3 per cent expansion recorded in Q4 2025.
On a quarter-on-quarter basis, seasonally adjusted gross domestic product in the January-to-March period declined 0.01 per cent, contrasting with the 1.4 per cent growth recorded in the preceding quarter.
Speaking at a media briefing on Friday (May 15), Bank Negara Malaysia governor Abdul Rasheed Ghaffour stressed that higher energy prices, supply chain disruptions and heightened uncertainty were expected to weigh on the external environment.
“As a small and open economy, Malaysia will inevitably face both direct and indirect impact from the ongoing geopolitical conflict in the Middle East,” he added.
Nevertheless, Abdul Rasheed expects the country’s economy to remain resilient this year, with growth projected to come in within the range of 4 to 5 per cent, supported by steady domestic demand and continued export expansion.
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Exports rebound
Malaysia’s net exports for the first quarter rebounded by 13.5 per cent, after a decline of 32.9 per cent in the previous quarter, based on the Department of Statistics Malaysia (DOSM).
This recovery was driven by a 5.2 per cent rise in exports alongside a moderation in imports to 4.6 per cent.
Export growth was mainly driven by continued expansion in electrical and electronics shipments. Gross import growth eased amid slower growth in capital, intermediate and consumer goods imports.
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The latest data echoed the World Bank’s recent assessment of Malaysia’s economic resilience.
Zafer Mustafaoglu, division director for the Philippines, Malaysia and Brunei at the World Bank, said on Thursday that Malaysia’s economy was expected to grow 4.4 per cent this year, driven primarily by robust domestic demand.
He said the country consistently exceeded expectations in the second half of 2025, despite a “profoundly uncertain” global environment.
Ringgit supported by strong fundamentals
The ringgit remained broadly stable in the first quarter of 2026, with a 1.4 per cent gain in the nominal effective exchange rate against key trading partners.
The local currency also appreciated by 0.5 per cent against the US dollar during the quarter, despite the dollar strengthening following the onset of the Middle East conflict amid risk-off sentiment.
“The appreciation was supported by Malaysia’s strong domestic fundamentals and growth momentum, alongside continued non-resident inflows into domestic markets,” said Abdul Rasheed.
The ringgit’s seven-day winning streak against the US dollar ended on May 8 as investors adopted a “wait-and-see” approach prior to the Q1 GDP announcement.
Despite this recent dip, the currency has maintained a strong performance since the beginning of the year.
As at Friday noon, the ringgit stood at 3.9443 against the greenback, marking a 2.8 per cent gain from its New Year’s Day level of 4.0585.
Against the Singapore dollar, the ringgit strengthened to 3.0886, a 2.2 per cent appreciation compared to the 3.157 rate recorded on Jan 1.
Services and manufacturing remain key drivers
Malaysia’s economic growth in Q1 was underpinned by resilient household spending, aided by festive spending and government cash assistance, as well as continued investment activities.
However, several sectors showed signs of cooling following a particularly strong previous quarter.
Mohd Uzir Mahidin, chief statistician at DOSM, said major economic sectors remained expansionary, although growth momentum eased.
The services sector – the primary driver of growth – expanded 5.6 per cent in Q1, compared with 6.2 per cent in the previous quarter.
Similarly, the manufacturing sector grew 5.9 per cent, slightly below the 6 per cent recorded in Q4 2025.
The construction sector’s growth normalised to 7.7 per cent following a period of double-digit expansion, while the agriculture sector grew 2.6 per cent, compared to 5.7 per cent previously.
In contrast, the mining and quarrying sector contracted 2.1 per cent – down from a 1.4 per cent expansion in the prior quarter – due to reduced production levels.
“Overall, economic activity remained underpinned by domestic events and policy measures that bolstered demand and sectoral performance,” said Mohd Uzir.
Last week, Bank Negara kept the overnight policy rate steady at 2.75 per cent, citing the nation’s fundamental resilience amid the Iran war.
Inflation expected to edge higher
Headline inflation rose to 1.6 per cent in the first quarter from 1.3 per cent in the previous quarter, while core inflation moderated to 2.1 per cent from 2.3 per cent.
Bank Negara said the rise in headline inflation reflected some initial cost pass-through of higher global cost pressures, partly due to the conflict in the Middle East.
Electricity charges and fuel prices, particularly RON97 and diesel, increased during the quarter, leading to slower declines in electricity and fuel inflation.
Headline inflation is projected to average 1.5 to 2.5 per cent in 2026.
Abdul Rasheed said inflation is expected to edge higher following escalations in the Middle East due to elevated global energy and commodity prices, broadly in line with expectations.
However, he said existing policy measures, including targeted fuel subsidies and other mitigation efforts, are expected to help contain broader inflationary spillovers in the near term.
“The extent and pace of pass-through to domestic prices from the ongoing conflict will also depend on firms’ pricing behaviour and demand conditions,” he added.
Transport Minister Anthony Loke said earlier this week that the current mechanism for the RON95 petrol subsidy would remain unchanged for now amid concerns over a planned subsidy review.
Currently, RON95 petrol is subsidised at RM1.99 per litre for eligible Malaysians, subject to a monthly cap of 200 litres.
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