2025 economic performance unexpectedly positive

Despite the justified caution due to external headwinds and disruptive trade and tariff negotiations the Malaysian economy performed above expectations.

The Malaysian economy performed well in 2025 due to good economic management and sound fiscal and monetary policy.

Economic growth has been strong despite global headwinds, and it looks likely that GDP growth will be around 4.7% in line with the new official forecasts. This will be a good outcome, above mid-year expectations.

Private spending was boosted by higher civil service pay, the increase in the minimum wage to RM1,700 per month and the STR/Sara transfers worth RM13 billion with RM2 billion more for the universal Sara scheme.

Nonetheless wages have still struggled and the monthly median wage fell from RM3,064 in January to RM2,864 in June.

High foreign direct investment (FDI) has been a success story of 2025. FDI is high in areas such as data centres but with few real economic spillovers.

Investment in the Johor-Singapore Special Economic Zone (JS-SEZ) will be localised and may be mainly property related. So these benefits must be captured to make a long-term impact.

Domestic direct investment (DDI) has been weak for many years because the returns in Malaysian business investments as well as financial investments in equities and fixed income Malaysian government securities are very poor.

Returns overseas are better. For example, year-to-date (YTD) returns on Bursa Malaysia are 0.08% and five-year returns are down 1.8% compared to the S&P500 which is up 16.1% YTD and up 86.4% over five years.

The real interest has been in trade with record exports and total trade, and a rebound in the trade surplus despite the concerns about US tariff negotiations, the outcome of which has proven largely positive.

The US has removed tariffs on more than 2,000 items from Malaysia, while exports to the US rose by 13.9% from January to November. Imports rose by 7.9% and the overall trade surplus with the US rose by 19.5%.

While headline inflation has been lower than expected many people still feel the pressure of the rising cost of living. This is the lingering problem of structurally low incomes and underemployment which are not being addressed especially for middle-income groups and pensioners.

Producer prices have been falling throughout 2025 compared to last year due to lower input costs, a stronger ringgit and greater competition.

While this is good in the short-term if lower prices are passed on to consumers, pressure on prices will squeeze margins and harm businesses if it is prolonged.

Part of this is an exchange rate effect. The ringgit has strengthened 9.2% against the US dollar and 3.9% against the Singapore dollar since January.

This makes exports more expensive and imports cheaper, forcing firms to cut costs and prices to compete. This cannot be sustained over a long period and suggests the ringgit is too strong.

The strength of the ringgit reflects positive economic management with four Madani government budgets improving confidence and setting sound fiscal conditions.

Taxes have risen, government spending has improved, RM15.5 billion in subsidy rationalisation savings have been locked in and changes in development spending, with the GEAR-up programme providing support, have all helped.

Bank Negara has supported this with sound monetary policy and financial regulation, even achieving a small cut in interest rates.

So while there is a good story to tell about overall economic management and performance the challenge for the government is to turn this into positive sentiment for businesses, consumers and investors.

There are lingering concerns that many people on middle-incomes, many micro, small and medium size companies and many financial investors do not feel the benefits.

Changing this narrative and managing the inevitable risks to come will be the main economic challenge of 2026. - FMT

The views expressed are those of the writer and do not necessarily reflect  those of MMKtT.