KUALA LUMPUR (May 11): Malaysian consumer spending is expected to become more cautious in the second quarter of 2026, as rising inflationary pressures and the government’s push for more targeted fuel subsidities dampen domestic consumption, according to economists.

Research houses warn that domestic policy changes, compounded by persistent geopolitical tensions in the Middle East, are likely to weigh on household sentiment and discretionary spending in the coming months.

“While the Budi Madani quota adjustments have exerted a minimal drag on spending thus far, the government’s ongoing refinement of eligibility thresholds for targeted petrol subsidies may induce more cautious consumption patterns, particularly among higher-income households,” MBSB Research said in a note.

The government recently signalled plans to further tighten fuel subsidy eligibility further by excluding high-income earners, commonly referred to as the T20 income group, as well as foreigners. While details are scarce as the matter is still being discussed, this comes on heels of a recent move in March that lowered the standard monthly subsidised fuel cap from 300 litres to 200 litres.

“These changes will likely lead to a direct pull-back in automotive fuel sales and hit discretionary spending more broadly in the second quarter,” Pantheon Macroeconomics Ltd said in a separate note. The sector already suffered a sharp contraction after falling by 7% in March as compared to the February out-turn, it added.

MBSB cautioned that these domestic policy shifts, combined with supply-side risks the from prolonged Middle Eastern conflicts, could further depress sentiment as higher energy and logistics costs filter into the broader economy.

Their cautious outlooks come despite Malaysia’s distributive trade sector recording its strongest growth in three years in March 2026. Driven by stronger wholesale trade, retail activity and motor vehicle sales, the entire distributive trade expanded by 7.5% year-on-year in the January-to-March period, compared with 5.2% growth a year earlier.

However, MBSB noted that the sharp increase in trade value was not matched by a similar rise in trade volume. This suggested that recent gains were increasingly driven by higher prices rather than stronger underlying demand. “This widening gap between value and volume, particularly in wholesale trade, indicates that recent gains are increasingly price-driven, aligning with the uptick in global commodity prices and producer costs,” MBSB said.

The first-quarter growth was also bolstered by seasonal spending linked to the Chinese New Year and Hari Raya festivities. At the same time, consumers benefitted from higher disposable incomes following the second phase of civil servant salary adjustments under the Public Service Remuneration System (SSPA), as well as cash aid disbursements under the Sumbangan Tunai Rahmah (STR) programme.

Over the longer term, Malaysia’s labour market strength and progressive wage reforms should continue to support domestic consumption, the research house said. It also expects domestic tourism activities to remain resilient and act as a buffer against potential volatility in international travel demand caused by the global tensions.

In addition, extension of the Visit Malaysia Year 2026 initiatives into 2027 is also expected to provide continued support for inbound tourism and related consumer sectors over the longer term, MBSB said.