KUALA LUMPUR — The Malaysian economy expanded by 5.4 per cent in the first quarter of 2026 (4Q 2025: 6.2 per cent), driven mainly by domestic demand. Household spending remained supported by positive labour market conditions, with the unemployment rate staying low, alongside targeted policy measures. Investment growth was underpinned by continued implementation of multi-year projects by both the private and public sectors, a high realisation rate of approved investments, and the ongoing rollout of national master plans. On the external front, export growth remained strong, driven mainly by continued expansion in electrical and electronics (E&E) exports. Meanwhile, gross import growth moderated amid slower growth in capital, intermediate and consumer goods imports.
On the supply side, growth in services sector moderated, reflecting a moderation in motor vehicle sales following the front-loading of purchases in the fourth-quarter ahead of the expiration of import duty waivers for electric vehicles. Meanwhile, manufacturing sector performance remained supported by stronger E&E performance, in line with continued demand for artificial intelligence and data centre-related components. Growth in the agriculture sector was lower amid normalisation in palm oil production following high output previously and ongoing replanting activities. The mining and quarrying sector contracted, mainly due to weaker oil and gas production. In addition, growth in the construction sector normalised from a double-digit growth amid a moderation in residential construction and civil engineering activities. On a quarter-on-quarter, seasonally-adjusted basis, the economy contracted by -0.01 per cent (4Q 2025: 1.4 per cent) given last quarter’s very strong performance.
Headline inflation increased, while core inflation moderated during the quarter
Headline inflation increased to 1.6 per cent (4Q 2025: 1.3 per cent) while core inflation moderated to 2.1 per cent (4Q 2025: 2.3 per cent). The higher 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, mainly RON97 and diesel, increased during the quarter, which led to slower declines in electricity (-6 per cent; 4Q 2025: -10.3 per cent) and fuel inflation (-1.5 per cent; 4Q 2025: -1.9 per cent). These increases were partly offset by lower core inflation, mainly reflecting softer inflation in food away from home (2.4 per cent; 4Q 2025: 2.8 per cent) and rental inflation (1.6 per cent; 4Q 2025: 1.9 per cent). Inflation pervasiveness, measured by the share of CPI items registering monthly price increases, continued to decline to 38.3 per cent during the quarter (4Q 2025: 39.6 per cent), trending well below the historical first-quarter average of 52.2 per cent.
The ringgit appreciated against currencies of most trading partners in the first quarter of 2026
In the first quarter of 2026, the ringgit strengthened against currencies of Malaysia’s major trading partners, as reflected in the 1.4 per cent nominal effective exchange rate (NEER) appreciation. The ringgit 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 ringgit’s appreciation was supported by Malaysia’s strong domestic fundamentals and growth momentum, alongside continued non-resident inflows into domestic markets. Notwithstanding some volatility following the Middle East conflict and reduced expectations for US Federal Reserve policy rate cuts, the ringgit has performed well on a year-to-date basis, appreciating by 3.3 per cent against the US dollar and 2.9 per cent on a NEER basis as of 13 May 2026.
Looking ahead, while external factors will continue to drive exchange rate movements, Malaysia’s firm economic prospects and sustained reform momentum are expected to provide enduring support to the ringgit. Bank Negara Malaysia (BNM) will closely monitor global developments and remains committed to ensuring the orderly functioning of the domestic foreign exchange market.
Credit growth increased driven by expansion in business loans, with support measures in place to help businesses navigate current challenges and enhance future resilience
The financial sector continues to support the financing needs of the economy. Credit growth to the private non-financial sector increased to 5.6 per cent in the first quarter of 2026 (4Q 2025: 5.3 per cent) following higher growth in outstanding loans (5.6 per cent; 4Q 2026: 4.9 per cent), particularly among businesses. Business loans expanded by 5.8 per cent (4Q 2025: 3.9 per cent) due mainly to higher loan growth among non-SMEs, while SMEs loan growth was broadly sustained at 6 per cent (4Q 2025: 5.9 per cent). For households, loan growth remained stable at 5.4 per cent (4Q 2025: 5.5 per cent), with steady loan growth across most purposes. Meanwhile, growth in outstanding corporate bonds moderated to 5.8 per cent (4Q 2025: 6.9 per cent) amid lower issuances in the quarter.
The banking sector also continues to proactively support customers through targeted and tailored measures to provide cash-flow relief, sustain business continuity, and preserve long-term financial viability.
- Financial institutions offer various programmes which provide repayment flexibility, restructuring of financing facilities, and advisory services to help customers manage cash flow challenges.
- Borrowers may also avail themselves to assistance through the Debt Management Programme and Small Debt Resolution Scheme offered by Agensi Kaunseling dan Pengurusan Kredit (AKPK).
- The SME Stabilisation Relief Facility (SME SRF), a RM5 billion relief financing facility to support micro, small and medium enterprises affected by the ongoing conflict in the Middle East also accepts applications from today. The facility aims to provide timely working capital support to otherwise viable SMEs that may be experiencing temporary disruptions to operations and cash flow challenges. Interested SMEs may apply from today from participating financial institutions.
Beyond immediate relief, longer-term structural reforms are key to strengthening the future resilience of SMEs. In this regard, BNM is working with the Credit Guarantee Corporation Malaysia Berhad (CGC) to introduce a RM10 billion guarantee scheme. The BNM-CGC Guarantee Scheme comprises six portfolio guarantee schemes addressing financial inclusion, climate and sustainability, productivity as well as resilience, and will be available to SMEs from 1 June 2026. Further information on the scheme will be announced in due course.
While growth in 2026 will be affected by external headwinds, Malaysia faces these challenges from a position of strength
Bank Negara Malaysia Governor Datuk Seri Abdul Rasheed Ghaffour says, ‘As a small and open economy, Malaysia will inevitably face both direct and indirect impact from the ongoing geopolitical conflict in the Middle East. Higher energy prices, supply chain disruptions, and heightened uncertainty are expected to weigh on the external environment. Nevertheless, the Malaysian economy is expected to remain resilient in 2026, with growth expected to come in within the range of 4 per cent – 5 per cent, supported by steady domestic demand and continued expansion in our export performance.’
The resilient domestic demand will provide a strong buffer against external headwinds. Household spending will be underpinned by firm labour market conditions and continuous policy support. Investment activity will be driven by the continued progress of multi-year projects in both the private and public sectors, as well as the ongoing implementation of national master plans. Despite the external headwinds, export growth will continue to be supported by the global technology expansion, particularly for E&E goods, reflecting Malaysia’s role in global value chains.
The 2026 inflation outlook remains contingent on evolving external cost conditions
Headline inflation is projected to average 1.5 per cent – 2.5 per cent in 2026. Following the Middle East conflict, inflation is expected to edge higher due to elevated global energy and other key commodity prices, broadly in line with expectations. In the absence of excessive demand pressures, existing policy measures, including targeted fuel subsidies and other mitigation measures, are expected to help limit near-term spillovers to broader inflation. However, the extent and pace of pass-through to domestic prices from the ongoing conflict will also depend on firms’ pricing behaviour and demand conditions. —BNM
