THE Malaysian economy began 2025 on a weak note amid tariffs uncertainties.
Malaysia’s gross domestic product (GDP) growth registered a slower growth of 4.4% year-on-year (y-o-y) in the first quarter of financial year 2025 (1Q25), compared to 4.9% in 4Q24, due to softening domestic demand (6% in 1Q25 versus 6.4% in 4Q24) and lower external demand (4.1% in 1Q25 versus 8.7% in 4Q24).
On a quarterly basis, the economy grew marginally by 0.7% in 1Q25, reversing from a small decline of 0.2% in 4Q24.
The economy has been slowing since 3Q24, and the 1Q25 GDP growth marks the third consecutive quarter of slowing trend on an annual basis.
Tracking the monthly GDP performance, GDP growth has slowed to 3.5% in January and 3.6% in February, respectively before peaking to 6% in March amid the Muslim fasting month before the start of a month-long Hari Raya Aidilfitri celebration in late March and early April.
Some observations of 1Q25 GDP growth attributions by expenditure (the sources of demand) and economic sectors (the production side) have revealed the following:
> Consumption and investment are two important expenditure components at 73.9% of total GDP and 21.3% of total GDP, respectively, of which private consumption makes up 60.7% and private investment at 16.5% of total GDP, respectively.
Private consumption was sustained at 5% in 1Q25, backed by positive labour market conditions and continued financial assistance to help ease cost of living.
Resilient consumer spending and stronger tourist arrivals (plus 15.8 y-o-y% to 4.3 million visitors in January to February 2025) have seen sustained expansion in restaurants and hotels, transport, communication, and recreation services and culture.
> There was continued growth in private investment, albeit slower to a single high growth of 9.2% in 1Q25 (12.7% in 4Q24), with 13.4% growth in capital spending on structure in non-residential and residential buildings, albeit slower compared to 19.5% in 4Q24 while higher spending on machinery and equipment (5.4% in 1Q25 versus 4.1% in 4Q24) as well as other assets (7.2% in 1Q25 versus 5.5% in 4Q24).
> Public sector expenditure, which makes up 18% of total GDP also increased higher by 6.2% in 1Q25 (5.8% in 4Q24). This was reflected in the federal government’s development expenditure and higher capital spending by public corporations, especially in oil and gas as well as utility sectors.
> Most economic sectors have registered positive growth in 1Q25, with the exception of a decline in the mining sector. The services sector grew by 5% in 1Q25 (5.5% in 4Q24), mainly driven by the expansion in almost all subsectors: transportation and storage (9.5%), real estate and business services (9.1%), food and beverage and accommodation (6.9%), wholesale and retail trade (4.3%), information and communication (3.6%) as well as finance and insurance (2.8%).
> Growth in the manufacturing sector was sustained at 4.1% in 1Q25, largely supported by the export-oriented industries such as electrical and electronics products, petroleum, rubber and plastic products.
The construction sector continued to expand by strong double-digit growth of 14.2% in 1Q25, albeit slower compared to 20.7% in 4Q24, driven by non-residential buildings (mainly the construction of data centres and factories), and residential and housing development projects while growth in the civil engineering sub-sector has tapered due to near-completion of strategic public infrastructure projects.
It is reckoned that escalating trade tensions and elevated tariffs policy-induced uncertainty may dampen Malaysia’s growth prospects.
Bank Negara believes that external risks pose only a minimal and manageable threat to the country’s economic stability, citing that resilient domestic demand will anchor growth.
The central bank’s internal estimate points to economic growth to be slightly lower than the earlier forecast of between 4.5% and 5.5% for this year, underpinned by the country’s strong and diversified economic fundamentals.
We think it is really appropriate to wait for the Malaysia and US trade negotiations to unfold so as to have more clarity about the economic effects of the tariffs before revising the full-year 2025 GDP estimates.
There are many moving parts influencing the GDP.
I think Bank Negara will likely revise the GDP growth after the ending of the 90 days reciprocal tariffs pause, which by then we will have more data points and information.
A sustained tariffs de-escalation, followed by a swift resolution of favourable trade negotiation outcomes would provide certainty, and ease the trade pressures, lessening the negative spillover effects on domestic demand via lower exports and income as well as cautious investment spending.
We see a 35% chance that the GDP growth could come in below 4% for this year.
The acceleration of government spending, more robust tourism activities to sustain services demand, a continuation implementation of approved investment projects and better trade negotiation outcomes or at least a degree of certainty would keep the economy growing at a decent pace.
The second and third quarter’s economic growth is a key metric to watch because it can help to assess whether the enduring tariff increases uncertainty will have a disproportionate impact on trade and its spillover effects on the domestic economy.
The effects of tariffs on global trade flows, supply chains, and domestic demand are expected to become more evident as the year progresses.
While some temporary pauses in the reciprocal tariffs offer a brief respite, the potential for widespread disruption remains.
The uncertainty arising from the unpredictability of the tariff policy can lead to shifts in expectations, perceptions of risk, and changes in business sentiments and strategies.
We have already observed signs of front-loading shipment in exports, especially for the electrical and electronics products and other products as firms push their goods to the United States market during a temporary pause of tariffs.
While this stockpiling may initially boost demand, it could lead to a potential “inventory hangover” later if demand slows or tariffs are not further increased as expected.
Our channel checks indicate that overseas buyers’ inventories are likely to be depleted in late May or June due to anticipated restocking efforts triggered by tariffs.
Some customers may have adjusted their order quantities, due to concerns that consumers would reduce demand on higher prices due to the tariffs tax.
Businesses also indicated that customers have requested to hold on to their shipments if the deliveries could not reach the US market before the expiry of the 90 days pause while waiting for the tariff negotiations outcome.
As Malaysia’s trade negotiations with the United States continue amid global economic uncertainties, the government has taken a multi-pronged approach to mitigate the impact of tariffs, focusing on boosting domestic demand and investment, trade negotiation and trade diversification.
The establishment of the National Geoeconomic Command Centre, a high-level coordination body is playing a central oversight role to coordinate national responses and implement specific measures and strategies to mitigate potential impacts and support impacted sectors.
The government will focus on generating domestic economic activities, especially accelerating the implementation of approved projects, especially flood mitigation projects, repair of dilapidated schools, and construction of clinics.
To expedite maintenance and repair works for dilapidated schools and clinics, among others, it will streamline procurement policies and procedures for small contractors, such as increase the limit for procurement by quotation from RM1mil to RM3mil, and the limit for procurement through balloting from RM100,000 to RM200,000.
There is also an additional RM1bil loan guarantees and financing for small and medium enterprises (SMEs) affected by US tariff measures.
Additionally, there is an increase in soft loan funds by RM500mil through development financial institutions to support affected SME entrepreneurs.
The government is also committed to accelerating the pursuit of regional cooperation and new markets, the Asean Power Grid, Johor-Singapore Special Economic Zone, RM1bil infrastructure upgrading along the Malaysia-Indonesia border in Borneo, a new road realignment and further development under the Northern Corridor Economic Region.
As part of the efforts to diversify markets, the government will promote regional cooperation and new markets through initiating negotiations for new trade and investment agreements with the European Union, South Korea, Japan, and the Gulf Cooperation Council.
On the monetary front, Bank Negara has lowered the statutory reserve requirement ratio by 100 basis points to 1% from 2%, releasing about RM19bil liquidity to the banking system, providing strong assurance that there is ample liquidity in domestic financial system to support credit demand.
The May Monetary Policy Committee’s statement undertone is somewhat dovish, signalling its readiness to cut interest rates should the economy slow down significantly.
Bank Negara indicated that the balance of risks to the GDP growth outlook is tilted toward the downside.
There were high expectations that Bank Negara will eventually reduce its overnight policy rate by 25 to 50 basis points in 3Q25 to cushion the impact of tariffs on domestic demand.
It is expected that Bank Negara will wait for more clarity on the tariffs negotiation outcome expected in July and incoming data to ascertain the impact on domestic economy.
An early rate cut is likely if GDP growth slows to below 4% and domestic demand is under threat due to the spillover effects of a sharp downturn in exports demand.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own
