Kenanga Investment Bank has raised its outlook for Malaysia’s economy, forecasting growth to come in at the upper end of its revised 4.5% to 5.0% range for 2026, supported by resilient domestic demand, sustained electronics exports and continued investment linked to artificial intelligence (AI).
In its latest macroeconomic outlook, the research house said Malaysia’s economy remains well-positioned despite a more challenging global environment shaped by geopolitical tensions and softer external demand.
The bank said the conflict involving the United States, Israel and Iran has emerged as the dominant global economic theme in 2026, replacing trade tensions as the key source of uncertainty.
Although a ceasefire between the US and Iran has reduced the risk of major disruptions to global energy supplies, Kenanga cautioned that geopolitical uncertainty, commodity price volatility and weaker global demand continue to pose downside risks to the world economy.
The research house expects global growth to moderate as higher energy costs weigh on Europe and the United Kingdom, while the United States continues to benefit from resilient consumer spending and investment driven by AI-related industries.
Japan is also expected to remain relatively resilient, supported by stronger wage growth and improving domestic demand.
Malaysia supported by AI-driven exports
For Malaysia, Kenanga said growth will continue to be underpinned by resilient household spending, targeted government assistance, strong services sector activity and sustained demand for electrical and electronics (E&E) exports, particularly those linked to AI infrastructure.
However, it expects economic expansion to moderate in the second half of 2026 as inventory accumulation normalises, global demand softens and favourable base effects diminish.
Despite ongoing volatility in global energy markets, Kenanga expects Malaysia’s inflation to remain well contained.
Consumer price inflation is projected at 2.1% in 2026, easing slightly to 2.0% in 2027, as targeted subsidy measures continue to cushion households from higher energy costs.
Nevertheless, the bank warned that a potential severe El Niño event could push food prices higher and pose upside risks to inflation.
BNM expected to stay on hold
Against this backdrop, Kenanga expects Bank Negara Malaysia (BNM) to maintain the Overnight Policy Rate (OPR) at 2.75% throughout 2026.
The research house believes the central bank will look through temporary supply-driven inflation pressures while continuing to support sustainable economic growth.
Globally, Kenanga expects major central banks to adopt a more hawkish stance following the energy shock.
The US Federal Reserve is now expected to keep interest rates unchanged through 2026 before delivering its first rate cut in the second quarter of 2027.
Meanwhile, the European Central Bank and the Bank of England are both expected to implement one additional rate hike before easing policy in 2027, while the Bank of Japan is forecast to continue gradually normalising monetary policy.
Fiscal deficit seen widening slightly
On the fiscal front, Kenanga revised its forecast for Malaysia’s fiscal deficit to 3.8% of gross domestic product (GDP) in 2026 from an earlier estimate of 3.6%, compared with 3.7% in 2025.
The bank said higher government spending on targeted subsidies and development projects will place additional pressure on public finances.
However, stronger contributions from Petroliam Nasional Bhd are expected to offset part of the increased expenditure, helping to contain the overall fiscal impact.
With growth in the 2Q26 estimated to exceed 5.0%, average GDP growth in the 1H26 would most likely be around 5.0% or higher, reflecting robust 1H26 momentum (1Q26: 5.4%). Though the outlook for the 2H26 is for growth to moderate, the house expects it to remain above 4.0%, supported by sustainable E&E exports, domestic demand, steady tourist arrivals, and de-escalation of geopolitical tension in the Middle East. Against this backdrop, Kenanga revised its 2026 GDP growth forecast upward to 4.5%-5.0%.
