Economic Focus: 2026 Outlook - Steadily charting growth

We remain positive of a sustained growth trajectory in 2026 under the Madani Economic Framework, supported by an expansionary yet prudent fiscal spending as well as healthy private expenditure. Malaysia's 3Q25 economic performance is a strong testament of the country's solid fundamentals. Despite the initial concerns over trade uncertainties, 3Q25 GDP grew stronger than expected at 5.2%, compared to 1H25 GDP growth of 4.4%. Robust labor market with low unemployment rate of 3.0% and historic high labour force participation rate ensures resilient and steady domestic consumption. Meanwhile, tailwinds from investment renaissance backed by record high approved investments in 2021-2024 underpins the steady growth momentum for capital expenditure in 2026, lending further support to domestic demand.

While uncertainties surrounding US trade policies are receding, the full impact of US trade tariffs is likely to result in moderating external trade in 2026. We take comfort that the economic fallout is expected to be minimal given Malaysia's diversified export structure and deep integration into global supply chains as well as the recent conclusion of Malaysia-US Reciprocal Trade Agreement in October 2025. Following the successful 2025 ASEAN chairmanship, 2026 will witness the signing of the ASEAN Digital Economy Framework and the commencement of the Vietnam-Malaysia-Singapore power grid - the first phase of ASEAN Power Grid - both of which will enable Malaysia to advance its high-growth high-value agenda under the New Energy Transition Roadmap (NETR) and New Industrial Master Plan (NIMP) 2030. Meanwhile, Visit Malaysia 2026 is set to be a major growth catalyst, targeting ~47m foreign visitors (vs 40m in 2025) to propel Malaysia's economic growth.

Budget 2026 showcases the government's commitment to pursue fiscal consolidation and rebuild fiscal buffer for long-term sustainabiity. Notably, PETRONAS dividend will fall significantly to a 9-year low of RM20bn in 2026 from RM32bn in 2025, illustrating the government's fiscal discipline. Financial assistance to the low-income group will be boosted by 15% to a record high of RM15bn (vs RM13bn in 2025) and various income tax reliefs on healthcare, education and insurance have been increased/extended, which will ensure household disposable income remains intact. More importantly, 2026 budget will fall to the lowest since 2019 at 3.5% (vs 3.8% in 2025), as the government is committed to a achieve a medium taget deficit target of 3.0%.