Socio-Economic Research Centre executive director Lee Heng Guie.
KUALA LUMPUR: Malaysia’s domestic demand may come under pressure should there be a sharp slowdown in exports arising from the ongoing tariff war.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie warned that weaker export growth could lead to reduced loan demand among businesses, higher unemployment and softer retail spending.
“It is not just about trade. The impact of tariffs will trickle down to domestic demand.
“Companies that supply intermediate goods to exporters will also be hit due to lower demand, affecting their operations and spending.
“Loan demand to fund expansion plans will also be reduced as a result,” he said at SERC’s Malaysia Quarterly Economy Tracker (January-March) 2025 media briefing, titled “Decoding the impact of Trump’s liberation day tariffs”.
Lee pointed out that assuming a company’s orders are cut by half due to the tariffs, it would not maintain the same headcount.
“There is also the uncertainty on how long the situation will drag on for. Businesses will look to reduce operating costs, whether by cutting the number of shifts or reducing overtime shifts.”
According to Lee, a sharp slowdown in exports – as experienced during the global financial crisis and the Covid-19 pandemic – would have a trickle-down effect on domestic demand and could significantly drag down the country’s overall gross domestic product (GDP).
“During the global financial crisis, Malaysia’s real exports contracted by 11.7 percentage points (ppt) in 2009, from an expansion of 1.8 ppt in 2008.
“Real GDP growth turned negative, slipping to -1.5% in 2009 from 4.8% the year before. Domestic demand also slowed sharply, contributing just 0.2 ppt to GDP in 2009 compared to 5.4 ppt in 2008,” he said.
During the Covid-19 pandemic in 2020, Lee said Malaysia’s real GDP contracted by 5.5%, with real exports declining by 5.5 ppt from a smaller contraction of 0.7 ppt in 2019.
“Domestic demand also weakened sharply, falling by 5.1 ppt in 2020 from a positive contribution of 4.1 ppt in the previous year,” he said.
Hence, Lee emphasised the need to avoid burdening businesses with higher operational costs during this period.
He said the current climate should prompt the government to reconsider and potentially delay planned policy changes, such as fuel subsidy rationalisation, multi-tier levy and electricity tariff hikes.
“With regards to the subsidy rationalisation of RON95, oil prices are coming down. The price of Brent crude oil is currently at US$66.38 per barrel.
“As such, the government’s subsidy spending on RON 95 would be much lower now. This gives the government some room to manage the impact on the budget deficit,” he said.
Lee also warned that Malaysia could face an influx of foreign goods, as countries hit by tariffs seek alternative markets – taking advantage of Malaysia’s relatively lower import barriers.
“This could weaken the domestic industry. The government needs to be prepared for this potential influx of foreign goods, not just in dealing with unilateral tariffs, but also considering the broader side effects of these tariffs,” he said.
Amid the ongoing uncertainty surrounding US tariff policies, SERC has revised its GDP growth forecast for Malaysia to 4%, down from 5% previously.
This is below Bank Negara’s projection of between 4.5% and 5.5%.
“This is the highest level of economic uncertainty we have ever seen, and it will likely persist for at least the next 90 days.
“Hopefully, by the end of that period, there will be clarity on the tariffs,” Lee said.
US President Donald Trump had instituted a broad 90-day pause, excluding China, on the implementation of the tariffs announced on April 2, dubbed Liberation Day, to allow for negotiationswith other countries.
