2026Q1: How Vulnerable is Malaysia to an Oil Shock?

30 March 2026

A. WORLD ECONOMIC OUTLOOK UPDATE

WAR, OIL AND THE WORLD ECONOMY

From oil shocks to recession? While most people assume the economic consequences from the military conflicts in Iran will be much less severe and believe that the global economy could withstand the conflict, we must not be too complacent about the economic risks this war creates.
The impact of war and oil shocks on the global economy is largely determined by the degree of oil price increases (permanent or temporary) and the duration of supply disruptions.
Sustained, large increases in oil and gas prices place net energy-importing Asian countries in a highly vulnerable position (concentration risk exposure) to the energy shock, triggering stagflationary pressures, widening trade deficits, and severe fiscal strain.
The world economy remains fundamentally weak. The Middle East conflicts come at a time when the global economy remains susceptible to the ongoing shift in tariffs policy, slower productivity growth, persistent budget deficits and soaring government debt. There are significant, synchronised risks arising from historically high stock market valuations, often described as "priced for perfection", combined with mounting concerns in the rapidly expanded private credit market. While massive AI investment brings significant productivity gains, it also carries risks of creating an economic bubble, which could trigger major economic shocks if it bursts.

B. MALAYSIA ECONOMIC OUTLOOK UPDATE

HOW VULNERABLE MALAYSIA IS TO AN OIL SHOCK?

Does Malaysia become less vulnerable to the US-Israel and Iran war crisis-induced disruptions? The impact of war and oil shocks on the Malaysian economy is largely determined by the degree of oil price increases (permanent or temporary) and the duration of supply disruptions.
Inflationary pressures were heightened. Historically, Malaysia has had experienced inflation between 2% and 3% annually, but oil shocks inflicted by wars in the Middle East have caused notable deviations above this range. A period of high inflation averaging 13.9% per annum (pa) in the First oil shock (1973-74) and 5.1% pa in Second oil shock (1979-80: Iranian Revolution) and 8.2% pa in Iran-Iraq war (1980-1988), largely driven by soaring global oil prices, rising import costs, and higher prices for industrial raw materials.
Bank Negara Malaysia (BNM)’s Monetary Policy Committee (MPC) has acknowledged the uncertainties from the ongoing conflict in the Middle East, indicating that the impact on the global and Malaysian economy will depend on how these developments evolve.
The key variables in transmitting an oil shock to a recession are the duration and magnitude of price surges, the central bank's monetary policy response, and the pre-existing state of the economic cycle.