KEY FINDINGS
Part 1: Economic Developments and Outlook
Malaysia's economy remained strong in 2025, with growth accelerating to 6.3 percent in Q4, its best quarterly performance in three years. This was supported by resilient domestic demand, particularly private consumption and robust investment.
Consumption is expected to stay resilient, buoyed by continued wage growth and positive employment conditions. Investment momentum remained solid, with strong inflows for intermediate and capital goods, and foreign investment in key sectors such as ICT, E&E, chemicals and data centers.
Exports grew robustly at 11 percent in Q4 2025, driven by strong global demand for E&E products amid AI-related activity. However, a sharp rebound in gross imports led to a narrowing of the current account surplus.
Labor market conditions have strengthened over the last year, with the labor force participation rate rising to 70.9 percent in Q4 2025 and the unemployment rate falling to a low of 2.9 percent, its lowest level since 2014. Job gains were broad-based across most age groups and were driven largely by the services sector.
Poverty has continued to decline, with the absolute poverty rate falling to 5.1 percent in 2024. This translates to approximately 416,000 households below the national average absolute Poverty Line Income of RM2,705 per month. While all states saw improvements, significant regional disparities persist, with Sabah’s poverty rate the highest at 17.7 percent.
Malaysia met its 2025 fiscal deficit target of 3.8 percent of GDP, supported by stronger revenue performance amid continued expenditure pressures. Total revenue was revised up to 16.6 percent of GDP, supported by increased SST collections following recent reforms and higher non-tax revenue, helping to cushion spending pressures.
Growth is projected to moderate to 4.4 percent in 2026 due to global uncertainty, softer export momentum, gradual normalization in investment activity, and base effects from the strong prior year.
Near-term downside risks are mainly external, stemming from protracted conflict in the middle east, persistent policy uncertainty, escalating trade restrictions, a sharper slowdown in China, tighter global financial conditions, or a downturn in the technology cycle.
Headline inflation is expected to remain relatively moderate in 2026. Upside risks are notable, stemming from higher commodity prices and trade policy uncertainty amid the ongoing conflict in the Middle East, which can lift import prices.
Income inequality continued to decline, with the Gini coefficient falling to 0.390 in 2024. Income growth was strongest for the bottom 40% (B40) and middle 40% (M40) of households. However, disparities within population groups remain the primary driver of overall inequality.
To strengthen resilience, Malaysia can deepen its trade openness by lowering barriers and accelerating targeted sectoral reforms. Together, these reforms would broaden Malaysia’s export base, reinforce supply chain integration, and better position the economy to withstand external shocks while capturing emerging trade opportunities.
Part 2: Raising the Ceiling, Raising the Floor: The Jobs Agenda as a Productivity Agenda for Malaysia
- As Malaysia advances toward high-income status, its next development challenge is to create higher-quality, more productive, and better-paying jobs that can support durable gains in purchasing power.
- Though positive, wage growth since 2010 has lagged GDP growth and has failed to deliver on Malaysia's high-income aspirations. Wage growth has also been uneven, with those in the middle of the income distribution seeing the slowest wage gains. At the state level, there is also considerable variation, with several states reporting median real wages that are only marginally above the national minimum wage. Wage growth has been slower as a result of climate change, with flooding having a significant impact in certain regions and sectors.
- Skill-related underemployment is a symptom of the challenges faced in the labor market. While unemployment remains low and labor force participation is historically high, many workers – particularly tertiary graduates – are employed in jobs below their qualification level, pointing to persistent skills mismatches and limited absorption of high-skilled talent. Skill-related underemployment has a significant impact on wages: tertiary graduates who are underemployed face a wage penalty of 49.3 percent.
- One reason for slow wage growth is that top firms – which pay higher wages and offer high productivity employment – are not scaling. The top 10 percent most productive firms (“frontier firms”) in Malaysia pay their employees three times more, on average, compared to the median firm in the country. The market share of these firms, as well as absorption of the labor force, has deteriorated over the last decade.
- And the productivity gap between Malaysia's best firms and global leaders has widened, especially in digital- and knowledge-intensive sectors. Technology generation and commercialization have not improved, partly due to limited university-industry collaboration and technology transfer from foreign firms as well as brain drain of Malaysian inventors.
- The main reason for this reduced productivity growth is a business environment that limits firm entry, exit and expansion. These include regulatory barriers, uneven access to finance, limited competition, and slow insolvency processes, which prevent resources from flowing toward more productive firms. Addressing these constraints could yield sizeable GDP gains.
- Workforce constraints are also a challenge. Persistent skills gaps, shortages in high-value skills, and weak alignment between education and labor market demand limit productivity growth. These pressures are expected to intensify amid demographic change and the rapid diffusion of new technologies, including artificial intelligence.
- To “raise the ceiling” by enabling more productive firms to grow, while also “raising the floor” through stronger and more inclusive wage growth, there is a need for a comprehensive productivity-focused reform agenda that simultaneously strengthens the business environment, supports innovation, improves workforce capabilities, and better aligns skills development with employer needs.
- Key policy recommendations include:
- Strengthening good regulatory practices, competition policy, and public service delivery to improve the business environment.
- Expanding innovation and trade financing, and strengthening the innovation ecosystem for greater technology generation, transfer, and commercialization capabilities.
- Improving foundational skills and expanding lifelong learning, reskilling, and second-chance pathways.
- Making skills systems more demand-driven through stronger employer engagement, apprenticeships, labor market intelligence, and AI-related skills development.