Improved GDP growth forecast for this year, but beware of delayed tariff impact next year

Published on 03 Dec 2025.

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RAM Ratings maintains its GDP growth projection for Malaysia at 4.0%-5.0% for 2026, anchored by the expected continuation of domestic demand strength, building on the resilient momentum exhibited this year. Domestic fundamentals remain sturdy and supportive of continued growth, underlined by healthy labour market conditions in 3Q 2025 (unemployment rate: 3.0%; labour force participation rate: 70.9%) and the continued rollout of committed investment projects. Private consumption, one of the key growth pillars, is further supported by the expansion of cash assistance programmes, which was upsized to RM15 bil in 2026 from RM13 bil in 2025. The overall cost environment remains favourable despite ongoing subsidy reforms, with headline inflation averaging 1.4% in the first ten months of 2025. Full-year inflation for 2026 is projected to remain moderate, averaging between 1.0%-2.0% (2025F: 1.4%).

The strength expected in 2026 is also underpinned by the resilient economic performance seen this year. We lifted our GDP growth projections for 2025 to 4.7% from 3.5%-4.5% (YTD-3Q 2025: 4.7%), reflecting the robust momentum in 3Q 2025, where GDP growth accelerated to 5.2% (2Q 2025: 4.4%). The Q-o-Q rise in overall GDP growth can be attributed to the sharp recovery in the mining sector (9.7%; 2Q: -5.2%) following a period of contraction that was due to the scheduled maintenance shutdown of key oil and gas production facilities. Nevertheless, the biggest drivers of GDP growth continue to be the sustained expansion of the services and manufacturing sectors. These two key sectors have demonstrated resilient growth performance despite facing global trade uncertainties and US trade protectionist measures. 

However, export growth is expected to moderate, as the impact of US reciprocal tariffs and the payback from earlier front-loading activities begin to materialise. The IMF also projects global trade growth to slow from 3.6% in 2025 to 2.3% in 2026, underscoring the external challenges for Malaysia. Despite these headwinds, recent favourable trade negotiation outcomes between the US and Malaysia have provided greater policy clarity and additional tariff exemptions. This easing of policy uncertainties is expected to offer some relief to businesses, particularly export-oriented industries, in terms of operational planning and business strategy. Tariff pressures could also ease as businesses worldwide gradually readjust their supply chain strategies and adapt to the new trade environment. 

The near-term risk to outlook remains skewed to the downside. An escalation of trade tensions – particularly if the US extends a blanket import tariff to electrical and electronic (E&E) goods, which are Malaysia’s key export segment – would significantly weaken Malaysia’s overall trade performance.

Malaysia’s fiscal consolidation is progressing steadily. We project fiscal deficit to narrow to 3.5% of GDP in 2026, from 3.8% in 2025, mainly due to tighter spending controls. We expect government debt to remain at 65.7% of GDP at end-2026, unchanged from end-2025 (2024: 64.6%). The still elevated debt ratio highlights the importance of continued fiscal discipline. Revenue growth is anticipated to be modest, with development expenditure growth restrained to support deficit reduction.

Summary of RAM’s key projections

Read the full Quarterly Economic Update report here.

 

Analytical contacts Tan Wan Ying (603) 2708 8251 wanying@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Woon Khai Jhek, CFA (603) 2708 8286 khaijhek@ram.com.my

 

About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 

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