Output is projected to increase by 5.1% in 2025 and 4.8% in 2026. Domestic demand will be the primary driver of growth. Private consumption is likely to remain strong and favourable labour market conditions. Stronger external demand is expected to support steady export growth. Investment is projected to benefit from new opportunities in technology-intensive sectors and the expected rebound in exports. Despite an expected uptick of inflation related to the planned withdrawal of fuel subsidies, and risks around the size of this uptick, inflation is expected to remain below its long-run average.

Government debt has increased rapidly and raising the pace of fiscal consolidation will be required to rebuild fiscal space, including by mobilising more tax revenues and phasing out fuel subsidies, while strengthening support to vulnerable groups. The current neutral monetary policy stance should be maintained given the tight labour market. Substantial gender gaps are holding back economic opportunities for women, which could be addressed by investing more into childcare support and promoting workplace flexibility. Reducing skill mismatches could boost both growth and social inclusion.

GDP growth slowed to 1.8% in the third quarter from 2.9% in the previous quarter, largely due to a contraction in private consumption . Both headline and core inflation have been falling and stood at 1.9% and 1.8%, respectively, in October. Unemployment has continued to fall, reaching 3.2% in September, lower than the pre-pandemic level, while the manufacturing wage bill has been improving steadily. Job vacancies are above their 2019 level and particularly high in the services sector. A higher minimum wage and more public spending on social assistance, in combination with higher salaries for civil servants, are likely to support private consumption.

Exports of goods and services were 8.5% higher in real terms than a year earlier during the first three quarters of 2024. Nominal merchandise exports to the United States, Malaysia's third largest export destination, increased by 19.2%, while exports to China, the country's second largest export market, decreased by 2.4%. Tourist arrivals in the first nine months of 2024 increased by 27% year-on-year, reaching 91% of the same period in 2019. Tourist arrivals from China, including Macau and Hong Kong, almost tripled compared with the same period in 2023.

The monetary authorities have maintained the policy rate at 3% since May 2023. With inflation below its long-term average of 2%, the current neutral monetary policy stance appears appropriate and provides room to accommodate a temporary increase in inflation as energy subsidies are withdrawn. At the same time, the central bank should stand ready to raise interest rates to counter possible second-round effects from higher energy prices if needed. Fiscal policy is set to continue the ongoing consolidation, which will help to reduce public debt and create fiscal space for upcoming spending pressures from ageing, decarbonisation and rising demand for social protection. The 2025 budget aims to reduce the federal government deficit to 3.8% of GDP in 2025, down from 4.3% in 2024, consistent with the medium-term fiscal framework target of a reduction to 3.0% by 2028. A reduction in petrol subsidies has been announced for mid-2025, which will improve the quality of public spending and support decarbonisation efforts. Revenues are expected to rise due to base broadening in income and consumption taxes, and improvements in tax collection.

Output is projected to grow by 5.1% in 2025 and 4.8% in 2026. Private consumption is expected to remain robust, with inflation remaining at low levels and favourable labour market conditions. Private investment will be supported by new opportunities in technology-intensive sectors and the expected increases in exports. Infrastructure projects and investments by public corporations will support public investment. Inflation is projected to rise in 2025 reflecting progress in reducing energy, but the effects should only be temporary. With trade amounting to 147% of GDP, Malaysia faces significant downside risks if global demand is weaker than expected.

Improving the targeting of social protection while raising social assistance coverage and benefit levels would allow stronger reductions of poverty and inequality. Better access to childcare and a better alignment of tertiary education curriculums with labour market needs would allow more workers, including women, to participate in the labour market and find jobs that match their skills. Addressing climate change requires implementing the planned withdrawal of fossil fuel subsidies and a stronger role for carbon pricing, complemented by stricter regulations. The introduction of a carbon tax on the energy, steel and iron sectors, foreseen in the 2025 budget with an implementation by 2026, is a first welcome step towards using price signals to achieve emission reduction targets