This article first appeared in The Edge Malaysia Weekly on February 16, 2026 - February 22, 2026

THE Malaysian economy surprised on the upside, with the headline gross domestic product (GDP) expanding 6.3% year on year (y-o-y) in the fourth quarter of 2025, exceeding the advance estimate of 5.7%. Overall, it recorded an annual GDP growth of 5.2% y-o-y.

With the ringgit also outperforming expectations, as well as decent export growth in 2025, there are plenty of reasons for Malaysia, especially the government, to toot its own horn. One could be forgiven for thinking Malaysia is entering its next period of sustained high growth.

However, some express scepticism about the robust headline numbers amid murmurings of tougher operating conditions on the ground, especially micro, small and medium enterprises (MSMEs). Malaysia’s liberal economic policy, especially on foreign investments and imports, have led to some of these businesses to be “outpriced” in the domestic market, while there is still not enough support to allow them to compete in the international market.

“What fuelled the economy in December so much that the advance estimate by the Department of Statistics Malaysia (DOSM) could miss by 0.6 percentage points?” asks an economist with a local bank, noting that the consensus among economists had been 5.9% for 4Q2025, slightly better than the advance estimate of 5.7%.

Bank Negara Malaysia announced last Friday that the economy in 4Q2025 was driven mainly by domestic demand, with higher household spending, strong investment growth, strengthening exports and service sector growth. During the quarter, domestic demand grew 9.0% y-o-y, faster than the 4.9% in 3Q2025, supported by the steady rise in both private consumption, which increased by 5.3% from 5.0% in 3Q2025, and government consumption (+8.0% y-o-y; 3Q2025: +7.1%).

Gross fixed capital investment recorded more robust growth of +9.3% y-o-y (3Q2025: +7.4%) with stronger expansion in investments in both the private (+9.2% y-o-y; 3Q2025: +7.3%) and public (+9.5% y-o-y; 3Q2025: +7.4%) sectors.

Economists with Maybank Investment Bank, AmBank Group, OCBC Group Research and MBSB Research had estimated a GDP growth of 5.9% in 4Q2025, while CIMB Research expected it to be in line with the advanced estimate of 5.7%.

Kenanga Research projected a GDP growth of 5.5% in 4Q2025, lower than the advanced estimate. Meanwhile, TA Research estimated that it could come in at more than 6%.

“Most economists, including us, were very cautious last year as we were unsure about the impact from the US tariff. Clearly, the Malaysian economy was outperforming the consensus,” says Dr Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia Bhd.

The Islamic bank, which is partly owned by DRB-Hicom Bhd (KL:DRBHCOM), also estimated a GDP growth of 5.7% in 4Q2025.

“The government’s resolve on fiscal consolidation has resulted in savings which allows it to channel [the savings] to cash transfer programmes. In addition to full employment status, consumer spending has been resilient as a result,” says Afzanizam.

“Furthermore, investment activities among private firms have been commendable. Apart from that, external demand has been forthcoming, with real exports accelerating to 3.9% in 4Q2025 from 1.7% previously.”

The 6.3% growth in 4Q2025 outperformed the 5.4% in 3Q2025 by almost one percentage point and led to full year GDP growth coming in at 5.2%, exceeding the forecast range of 4.0% to 4.8%.

The sustained GDP growth in 2025 comes amid concerns of higher US tariffs affecting external trade activities, supported by strong domestic demand. However, at the same time, credit growth in the private non-financial sector moderated to 5.4% in 4Q2025 from 6% in the preceding quarter, following slower expansion in outstanding loans of 5%, from 5.6% in 3Q2025.

Growth in business loans moderated to 3.9% in 4Q2025, from 5.5% in 3Q2025, mainly reflecting slower loan growth for working capital purposes among SMEs, at 4.3% compared with 6.0% in the third quarter.

“Business loan growth for investment-related purposes eased but remained above its long-term average,” says Bank Negara, when announcing the 4Q2025 economic and financial developments in the country.

Net exports, or trade surplus, declined marginally in 4Q2025 by 0.6% to RM45.8 billion from a year ago. In 3Q2025, the trade surplus grew 95.1% y-o-y.

If loan growth — which is one of the indicators of investment growth — and net exports were lower on a y-o-y basis in 4Q2025 than in 3Q2025, it can be assumed that economic activity has slowed somewhat.

Nevertheless, consumption and government expenditure could have propped up the economy in 4Q2025. But not everyone is convinced.

“If automotive sales is an indicator of strong domestic consumption, it was strong throughout the year, which does not explain the significant outperformance of GDP in 4Q2025 alone,” says the economist with a local bank.

“Cash transfers such as Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah (Sara) should not have boosted GDP to such an extent as they were utilised throughout the year. And in the case of Sara, only RM2.2 billion was budgeted.”

Therefore, an aspect that could explain the outperformance in 4Q2025 compared with the advance estimate as well as in 3Q2025 is the growth of data-centre-related consumption, as well as the export of services, say economists.

This was mentioned by Bank Negara, alongside stronger exports of electrical and electronic (E&E) goods in 4Q2025. E&E exports amounted to RM711.6 billion in 2025, an 18.3% jump from 2024.

“On the supply side, growth was mainly accounted for by the expansion in the service and manufacturing sectors. Higher growth in the service sector was mainly driven by consumer-related subsectors, government services as well as the ICT (information and communications technology) subsector following the operationalisation of data centres,” says the central bank.

“In the manufacturing sector, performance was driven by stronger production in the E&E subsector, induced by higher demand from the global technology expansion, alongside the increased output of consumer-related goods.”

While the outstanding GDP performance in 4Q2025 could be attributed to the growth in E&E and data-centre-related consumption and investments, the economist The Edge spoke to opines that the Malaysian economy is heavily driven by big foreign investors, compared with local producers.

Malaysia’s E&E industry, which made up 44.3% of total exports, is dominated by foreign investors, especially in the semiconductor subsector. The Bayan Lepas Free Industrial Zone in Penang, arguably the single most important industrial zone in the country, is dominated by multinational corporations (MNCs) such as Intel, Robert Bosch, AMD, Hewlett-Packard and Motorola.

While there have been a handful of Malaysian E&E players that have grown into major players such as Inari Amertron Bhd (KL:INARI), ViTrox Corp Bhd (KL:VITROX), Unisem (M) Bhd (KL:UNISEM) and Malaysian Pacific Industries Bhd (KL:MPI), their contributions to E&E exports could still be lower than those of MNCs.

Malaysia has become a regional hub for data centres, especially in Johor. Global hyperscalers such as AWS, Google, Microsoft and Nvidia have invested billions of dollars to set up data centres in the country, alongside AirTrunk, Equinix, Telekom Malaysia Bhd (KL:TM) and YTL Power International Bhd (KL:YTLPOWR). These are investments by giants, as even Malaysian companies TM and YTL Power are large corporations in their own right.

While the major MNCs and large Malaysian corporations are benefiting from the shift to the digital industrial revolution, the same might not be the case for local MSMEs, which produce less technologically advanced products and services. Nevertheless, the data to indicate this observation is only up to 2024, when MSME’s GDP grew 5.8%, contributing RM652.4 billion in value add or 39.5% to the country’s GDP, according to DOSM.

This shows that the Malaysian economy is dominated by large corporations as well as MNCs. However, the growth of MSMEs outperformed the country’s GDP of 5.1% in 2024, showing that it was resilient then.

Exports of MSMEs amounted to RM196.8 billion in 2024, a growth of 31.3% y-o-y compared with a growth of 3.0% y-o-y in 2023. This increase was supported by the service and manufacturing sectors, which grew 114.8% and 7.9% respectively.

MSME exports accounted for 14.3% of the total exports of RM1.51 trillion in 2024. Their performance data for 2025 will be released by DOSM on July 30, 2026.

In the 10 years leading up to 2024, MSMEs contributed between 37% and 39.5% to the country’s GDP, according to DOSM.

“The Malaysian economy is like a car with two engines. One engine is performing strongly, while the other is lagging behind,” says the economist The Edge spoke to, indicating that the economy is seeing a growth imbalance.

Some point out that MSMEs are under intense pressure to compete against foreign suppliers that are able to undercut the prices of local producers to gain market share. Nevertheless, there is no clear data to support this observation.

The government has been supporting MSMEs through loan guarantees and specific programmes aimed at digitalisation and export support. This includes RM20 billion in guaranteed financing through Skim Jaminan Pembiayaan Perniagaan Bhd and SME Corp, RM3.2 billion in micro loans through Tabung Ekonomi Kumpulan Usaha Niaga (Tekun) and Bank Simpanan Nasional, and RM2.5 billion in funding for SMEs by Bank Negara.

“This is a question of competitiveness among businesses, where it varies from one business to another. Competition has always been intense while the cost of doing business includes regulatory and compliance [costs],” says Afzanizam, when asked about the observation of MSMEs unable to rise up amid increasing competition from foreign suppliers.

“So those businesses that have not really scaled up may be the ones badly affected. It’s very intricate and complex as it reflects business dynamics.”

Resilient domestic demand and continued exports will support growth in 2026, says Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour in the statement announcing the 4Q2025 GDP growth numbers.

“Malaysia’s economy grew by 5.2% in 2025, on account of strong domestic demand and favourable exports, exceeding the forecast range of 4% to 4.8%. This growth momentum is expected to continue in 2026, supported by resilient domestic demand and exports.”

The central bank governor adds that household spending will benefit from the continued support from employment and wage growth, as well as government policy measures.

Investment activity will be driven by the further progress of multi-year projects in both the private and public sectors, with continued realisation of approved investments and implementation of catalytic initiatives under national master plans and the 13th Malaysia Plan.

Despite talk of full implementation of the US tariff this year, economists are still confident of resilient growth for Malaysia’s economy this year, bolstered by domestic spending and positive labour market conditions.

“On top of that, the exports of E&E products are expected to remain resilient, supported by the demand stemming from the ongoing global tech up cycle,” MBSB Research said in a note last Friday after the 4Q2025 GDP announcement.

The research arm of MBSB Bank revised its GDP growth forecast for 2026 higher to 4.6% from 4.3% previously, taking into account the strong growth in 4Q2025, the more robust domestic economic activities and less significant impact of tighter US trade rules.

Nevertheless, as a highly open economy, Malaysia’s growth outlook remains susceptible to external volatilities.

The sharper-than-expected narrowing of the current account surplus to RM2 billion (0.4% of GDP) in 4Q2025 from RM12.8 billion (2.6% of GDP) in 3Q2025 will keep Bank Negara vigilant of external balance developments, according to OCBC Group Research.

Notwithstanding the volatility in the quarterly profile throughout 2025, the full-year current account surplus widened to RM13.8 billion (1.6% of GDP) from RM27.7 billion (1.4% of GDP) in 2024.

“We upgrade the 2026 GDP growth forecast to 4.4% from 3.8% previously. This suggests slower growth compared with the 5.2% in 2025,” says OCBC Group Research.

“The stronger-than-expected GDP growth outturn in 2025, continued momentum in the electronics exports up cycle, domestic reforms bearing fruit and maintaining traction going into 2026 are the key reasons behind our upgrade.”

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