This article first appeared in The Edge Malaysia Weekly on May 18, 2026 - May 24, 2026

MALAYSIA’S economy may have entered 2026 with sufficient momentum to withstand the initial shocks from the Iran war and the resulting energy crisis, but economists believe the more painful effects are only beginning to surface as higher costs, supply disruptions and weakening global demand begin to filter through.

Gross domestic product (GDP) grew 5.4% in the first quarter, slightly above the official advance estimate of 5.3%, supported by resilient household spending, investment activity and continued strength in electrical and electronic (E&E) exports.

However, the print marked a sharp moderation from the 6.2% year-on-year growth recorded in the October-to-December quarter.

“At this point, the impact of the Middle East conflict on Malaysia is assessed to be contained, as the economy enters this period from a position of strength, supported by strong fundamentals and initial conditions,” Bank Negara Malaysia governor Datuk Seri Abdul Rasheed Ghaffour said during the central bank’s 1Q GDP briefing last Friday.

Yet beneath the headline number, momentum had already begun to soften by March, suggesting the economy may be losing steam more quickly than policymakers initially expected.

Economists The Edge spoke to warn that 1Q may ultimately represent the calm before a broader economic storm.

UOB Malaysia senior economist Julia Goh notes that while the 5.4% figure appears “robust” on the surface, signs of moderating momentum can already be observed as the escalation of Middle East tensions after Feb 28 began weighing more visibly on economic activity.

“We think downside risks are increasing as the conflict enters its 12th week and the Strait of Hormuz remains effectively closed,” she says.

According to Bank Negara’s data, monthly real GDP growth slowed from 7.1% in December to 6.8% in January, 5.2% in February and 4.1% by March.

The softer momentum came despite the quarter benefiting from two major festive spending periods — Chinese New Year in February and Hari Raya Aidilfitri in March — which typically provide a seasonal boost to consumption, retail spending and domestic travel.

Private consumption growth slowed to 4.7% in 1Q from 5.6% in the preceding quarter, while private investment eased to 7.8% from 9.2%. On a quarter-on-quarter seasonally adjusted basis, the economy was effectively flat, contracting marginally by 0.01%.

To some economists, that suggests the economy’s underlying momentum may already be weaker than the headline annual growth figure implies.

“I think there’s this risk of underestimating the impact of the war on growth, because it’s still a very uncertain environment that we are in,” says Socio-Economic Research Centre (SERC) executive director Lee Heng Guie. “Everything depends on when the Strait of Hormuz reopens, and even then, it will take time for conditions to normalise.”

Lee notes that consumer spending, investment and exports had already begun moderating before the full effects of the energy shock were felt.

“The growth slowdown may inch towards the lower range of Bank Negara’s full-year forecast of 4%-5%,” he cautions.

RAM Rating Services head of economic research Woon Khai Jhek concurs with Bank Negara’s point that Malaysia entered the crisis from “a position of strength”, helped by resilient domestic demand, government support measures and continued momentum in artificial intelligence (AI)-related semiconductor exports.

However, he cautions against drawing too much comfort from the 1Q data.

“Should supply conditions deteriorate further and the disruption proves prolonged, the drag on growth will grow progressively larger in the second half of 2026,” Woon says. “Dismissing these risks prematurely, simply because 1Q held up well, would be a mistake.”

The war in Iran and the closure of the Strait of Hormuz have triggered a surge in energy prices and disrupted global supply chains, pushing up production and logistics costs worldwide.

Bank Negara estimates that Brent crude prices rose to an average of US$102 a barrel within 30 days of the conflict, while shortages in intermediate input and petrochemical products have begun emerging globally.

Headline inflation in Malaysia rose to 1.6% in 1Q2026 from 1.3% in the previous quarter, driven partly by higher fuel and electricity prices. Bank Negara now expects inflation to trend towards the upper end of its 1.5%-2.5% forecast range this year.

The governor maintained that the inflationary pressures were still largely supply-driven rather than demand-driven, with no evidence yet of broad-based price increases across the economy.

But economists believe the cost pass-through effects may intensify in the coming months.

“There is growing caution on shortages in raw materials while firms are reporting higher costs, some of which are expected to be passed on to consumers,” UOB’s Goh says. “The effects on jobs and the labour market could also become more pronounced from the second quarter onwards.”

TA Securities economist Farid Burhanuddin argues that price pressures could become more broad-based, with second-round effects particularly visible in food prices and services.

“We may see a temporary pickup around June or July before some normalisation later,” he observes.

RAM’s Woon agrees with Bank Negara’s assessment that the current inflationary pressures are primarily supply-side cost-push inflation arising from higher energy prices, supply shortages and disruptions across global supply chains.

In such an environment, monetary policy tools such as the overnight policy rate (OPR) may have limited effectiveness in addressing the underlying source of inflationary pressures.

“The nature of this inflation increase, being primarily supply-side cost-push inflation, also means that monetary policy is unlikely to be tightened as a direct response. Bank Negara has previously articulated that the OPR is not the most effective tool to address supply-side price shocks, and that framing remains relevant today,” he says.

Woon says an OPR hike would likely only become necessary if inflation evolved into a broader demand-driven problem and inflation expectations became unanchored, which he stresses is not currently his base-case scenario. Conversely, any move towards monetary easing would require a much sharper deterioration in growth conditions, he adds.

“For now, the most likely path remains an extended hold, with Bank Negara staying data-dependent and monitoring whether the energy shock proves transitory or begins to feed into broader price expectations,” he says of the OPR.

Bank Negara maintained the OPR at 2.75% earlier this month, stating that the current monetary stance remained appropriate.

Most economists also expect rates to remain unchanged for now.

“Against this backdrop, we see growth-inflation trade-offs complicating the monetary policy stance,” Goh says. “As such, we expect the OPR to remain on hold until more clarity emerges over the next two to three months.”

The ringgit has so far been one of the region’s more surprising outperformers despite the geopolitical turmoil.

The currency appreciated 3.3% against the US dollar and 2.9% on a nominal effective exchange rate basis as at May 13, supported by Malaysia’s status as a net energy exporter, continued foreign inflows into domestic bond markets and relatively resilient economic fundamentals.

Apart from the Chinese renminbi and Singapore dollar, most regional currencies have weakened against the US dollar year to date, including the Indonesian rupiah, Philippine peso, South Korean won and Thai baht.

Bank Negara said Malaysia’s “firm economic prospects and sustained reform momentum” continued to support the ringgit despite heightened global risk aversion.

While economists agree that the ringgit continues to be supported by Malaysia’s relatively strong domestic fundamentals, they believe that the currency’s direction will ultimately be dominated by external factors.

OCBC Bank chief economist Selena Ling says prolonged risk aversion or a more hawkish US Federal Reserve could still trigger capital outflows from emerging markets.

“Malaysia will not be immune to a sudden risk-off sentiment shift, but may be muted by its healthy macro fundamentals,” she reckons.

SERC’s Lee similarly warns that the ringgit remains vulnerable to shifts in US monetary policy expectations.

“If the market expects the Fed to raise [rates], that could put some downward pressure on emerging currencies including the ringgit,” he says.

Still, TA Securities’ Farid remains relatively optimistic on the ringgit’s medium-term prospects, especially if the Fed eventually pivots towards rate cuts.

“There is room for the ringgit to strengthen further, potentially towards the 3.80 level,” he says. “The psychological barrier has already shifted, and given stable fundamentals, there remains upside potential for the ringgit over the medium term.”

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