World Bank lifts Malaysia growth forecast to 5.1pct, warns of AI slowdown [WATCH]

KUALA LUMPUR: The World Bank has raised its 2026 growth forecast for Malaysia to 5.1 per cent but warned that a potential reversal in the global artificial intelligence (AI) boom could pose a key downside risk to the economy.

The upward revision of 0.7 percentage points from its previous projection reflects stronger-than-expected economic activity in the first half of the year, with domestic demand expected to remain the main driver of growth.

Economists said Malaysia should leverage the current AI investment boom to strengthen capabilities that can support the economy even if global AI activity slows.

Universiti Teknologi Malaysia associate professor of property economics Dr Muhammad Najib Razali told Business Times that the country should prioritise moving up the semiconductor value chain.

He said this should include areas such as advanced packaging, chip design, research and development (R&D), specialised technologies and homegrown intellectual property.

"Malaysia should also focus less on the headline value of data-centre investments and more on domestic value creation.

"Important measures should include Malaysian supplier participation, skilled employment, technology transfer, R&D, intellectual property and productivity improvements.

"At the same time, Malaysia should accelerate AI adoption among domestic companies, particularly small and medium enterprises.

"The key question should gradually shift from 'How much AI investment are we attracting?' to 'How much productivity are Malaysian businesses generating from AI?' Education policy must support this transition," he said.

Najib said Malaysia could draw lessons from Singapore's approach to developing AI-ready talent and South Korea's focus on integrating AI into industrial development.

He said Malaysia should adopt a combination of both approaches, with universities and technical and vocational education and training institutions embedding AI across disciplines to equip graduates with both professional expertise and AI skills.

"Ultimately, Malaysia should not aim to become dependent on the AI boom. It should aim to become AI-enabled.

"The real measure of success is not simply the number of data centres or billions of ringgit invested, but how much Malaysian intellectual property, skilled employment, domestic business participation and productivity are created from those investments," Najib said.

MALAYSIA EXPOSED TO AI SLOWDOWN

World Bank lead economist for Malaysia, Apurva Sanghi, identified a potential reversal in the global AI boom as a key downside risk to Malaysia's economic outlook, Bernama reported.

Universiti Teknologi Mara senior lecturer Dr Mohamad Idham Md Razak said Malaysia would be significantly exposed to a global slowdown in AI-related activity, given the strong links between its export performance and the electronics, semiconductor and other AI-related supply chains.

Citing World Bank data showing that more than 70 per cent of Malaysia's export growth in early 2026 was attributed to AI-related products, he said a sharp decline in global AI investment could weigh on exports, manufacturing activity, investment and business sentiment.

"However, I would not describe this as an economy-wide vulnerability because Malaysia also has strong domestic consumption, services, energy, commodities and other manufacturing activities.

"The key issue is concentration: if AI-related demand weakens sharply, Malaysia would need other sources of growth to compensate for the external shock," Idham said.

He said Malaysia's semiconductor and E&E exports remained strong, but the country should watch whether demand for semiconductors, servers and data centre equipment starts to slow steadily.

"Other important indicators include semiconductor export growth, global data-centre capital expenditure, new data-centre projects, chip inventories, semiconductor utilisation rates and corporate investment plans by major technology companies.

"A sustained decline across several of these indicators would provide a stronger signal that the AI investment cycle is moderating," he added.

Najib said the bigger risk would be an overreliance on sustained foreign AI investment without building up the country's own technological capabilities.

"This is also where education becomes an economic resilience strategy. If Malaysian workers and companies can apply AI across industries, the benefits of AI become embedded in domestic productivity rather than depending primarily on foreign investment," he said.

DIVERSIFICATION CAN CUSHION SLOWDOWN.

Both economists said Malaysia has several sectors that could help cushion the economy if AI-related activity slows.

This includes infrastructure investment, services, tourism, domestic consumption, energy, commodities, construction, healthcare, logistics and broader manufacturing.

"Malaysia nevertheless has some protection because its economy is relatively diversified. Domestic consumption, services, tourism and infrastructure investment provide alternative growth engines," Najib said.

Idham said services were particularly important, as they were supported by domestic demand and were less directly dependent on the global technology investment cycle.

He said Malaysia could also strengthen tourism, halal industries, healthcare services, food processing, green industries and advanced manufacturing as additional growth engines.

"More importantly, we should use the current AI-driven investment cycle to strengthen the wider economy by developing local suppliers, skills, digital capabilities and higher-value manufacturing.

"That way, even if the AI cycle eventually normalises, the investment and productivity gains generated today can continue contributing to Malaysia's longer-term growth," Idham said.