Economic Focus: Navigating shocks, sustaining growth

• US-Iran tentative peace deal to ease inflationary pressure and fiscal concerns from elevated subsidy bills
• Resilient growth momentum to sustain in 2H26 with stronger focus on domestic consumption
• Cautiously optimistic of 2026 growth prospects with 4.5% GDP growth

Resolution to Middle East conflict in sight

The tentative US-Iran peace deal to restore access through the Strait of Hormuz pulled oil prices down from over US$110 to below US$75 (YTD average: US$88), allaying inflation and interest rate hike worries. While the timing of a full resumption of oil flows from the Middle East remains uncertain at this juncture, easing crude prices could give the government room to maneuver as it grapples with heavy monthly fuel subsidy bills of RM3-4bn, compared to full-year projection of RM15bn. This is set to provide a huge relief for the government to focus on boosting the economy without derailing its 2026 fiscal deficit target of 3.5%.

Economic growth trajectory remains on track

We believe domestic demand remains supported by sustained household spending, further realisation of investment projects and robust tourism activity. After recording impressive economic growth of above 5% in 2024-2025, Malaysia maintained its growth momentum in 1Q26, with GDP expanding by 5.4%, exceeding expectations. Admittedly, the higher crude oil prices have weighed on certain industries including logistics and energy-intensive manufacturing, but Malaysia's proactive fiscal measures and diversified economic structure with net energy export status have helped to partially cushion the impact of these temporary headwinds. While consumer and business confidence are likely to be adversely affected, with SMEs and low-income groups being more vulnerable, overall economic growth is expected to remain resilient.

Under-appreciated domestic resilience

Malaysia's robust labour market with unemployment hovering at 3% will underpin sustained domestic consumption. Importantly, 1Q26 tourist arrivals remained on a positive growth of 3% despite the air connectivity disruptions via Middle East transit hubs, thanks to the 25% y-o-y spike in Chinese tourist arrivals. Additionally, passenger movements at KLIA recorded a 14% y-o-y increase in 1Q26, reflecting solid outbound tourism for Malaysians due to broader economic growth. Meanwhile, our conviction of positive external trade despite the energy crisis has been validated by recent data - ex-E&E exports in Apr 2026 grew 29% y-o-y due to the broad transmission effect of rising oil prices on commodities. Separately, Apr 2026 E&E exports, accounting for 48% of total exports, surged 46% y-o-y, fuelled by relentless AI related spending globally. 

In a position of relative strength

We remain cautiously constructive on Malaysia's economic outlook and maintain our 2026 GDP growth of 4.5%, notwithstanding short-term challenges due to higher energy and commodity prices as well as supply chain disruption better than many of its Asian peers given its status as a net energy exporter. We believe Malaysia's strong fundamentals anchored by firm domestic demand and a diversified export base will continue to underpin the economy's resilience. Key downside risks include a prolonged Middle East conflict, slowdown in key trading partners, higher cost of living and lower-than-expected commodity production. 

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