Based on the strong foundations of 2025, the economic outlook for 2026 looks broadly positive and we can realistically expect underlying growth next year of 4% to 4.5%.
Inflation should be 1.5% to 2% and leading indicators, such as producer prices, suggest that cost and price pressure is subdued.
This should keep interest rates stable but there is the possibility of at least one interest rate cut if inflationary pressures remain low.
The fiscal position is sound because Budget 2026 has been very well designed. It is exactly the type of budget we should see at this point.
Government spending rose only in line with inflation, and it will be funded in part by significant savings of around RM15.5 billion from subsidy rationalisation, higher tax revenue and other efficiencies.
These savings are now built-in year-on-year and will help ensure that Malaysia will hit its primary fiscal target for 2026 to reduce the fiscal deficit to 3.5% of GDP and continue a consolidation path toward a 3% target by 2028.
Private consumption should remain strong, helped by the same RM15 billion STR-Sara payments, RM2 billion of which will be universal payments. We should not be surprised if a second or even third universal tranche is released as we approach the election.
Unemployment will remain low but underemployment is the main problem, and this is holding back wages which are likely to languish.
Median monthly wages fell in the first six months of 2025 and have some recovery to do and, although there is a scheduled review of the minimum wage any increase will be implemented in 2027, not next year.
The progressive wage will affect only 50,000 employees out of three million in the eligible category, so this will also not help much.
The positive outcome for trade in 2025 must be viewed with caution.
Malaysia External Trade Development Corporation (Matrade) data for January-November 2025 showed overall trade rising 5.8%, imports up 6.1%, exports up 5.6%, and the net trade contribution to GDP is 10.7% higher than over the same period in 2024.
Data for November recorded net trade falling 70% compared to October and 58.8% compared to November last year, whether this is a correction or a trend remains to be seen.
There are three main areas of risk to watch in 2026. First, the shifting sands of both the main political coalitions signal a significant and unwelcome risk and even a change of government or early general election.
Second, reopening old wounds on settled policy issues would also be a risk. Speculation about the regressive GST and renegotiating the Agreement on Reciprocal Trade (ART) with the United States are unhelpful.
Budget 2026 showed higher tax revenue from SST, and better collection from higher incomes and spending mean there is actually no need for higher taxes. If a new tax is needed an e-payments tax (EPT) should be used. A 1% EPT would raise RM28.8 billion.
As for the ART, having secured the removal of tariffs on 2,000 products, the focus should now be on removing non-tariff barriers and extending the benefits to all trading partners rather than returning to protectionism.
The third possible risk is a sharp correction in the ringgit. While many are boasting of the strength of the currency, the truth is that it is probably overvalued.
A strong ringgit makes exports more expensive and imports cheaper which harms Malaysian businesses struggling to compete.
These risks have an impact on business, consumer and investor sentiment and they must be acknowledged with contingencies devised to maintain stability.
Nonetheless the scene is set for significant reforms to raise income, investment and the welfare of the rakyat ahead of any election planned in the next two years.
The views expressed are those of the writer and do not necessarily reflect those of FMT.