PETALING JAYA: Amid heightened global uncertainties due to pressing US trade tariffs and the fragile Israel and Iran truce, Malaysia’s strong domestic demand is set to act as a buffer that will ensure the country’s economic growth trajectory and mitigate its slowing exports for 2025.
The government is forecasting a gross domestic product (GDP) growth of 4.5% to 5.5% this year, but this could be lower, economic experts noted, citing US trade policies and geopolitical risks.
For the first quarter of 2025 (1Q25), GDP grew 4.4% after expanding 5% in 4Q24. The full-year GDP growth in 2024 was 5.1%.
HSBC chief Asia economist and co-head of global investment research for Asia, Frederic Neumann, in responding to queries from StarBiz, said the elevated geopolitical tensions pose a headwind for global growth, including Malaysia’s economy.
However, he said with robust fundamentals, the economy is still expected to expand 4.2% this year and 3.9% in 2026 – an impressive performance given global uncertainties.
“Domestic demand will offer a cushion against slowing exports and cooling foreign direct investment (FDI) inflows.
“Cooling inflation, for example, should support household consumption, and healthy infrastructure investment in recent years is now spurring private capital expenditure or capex as well.
“Should global uncertainties abate, especially around tariffs, growth could come in even stronger over the coming two years than currently expected,” Neumann said.
He said although exports are expected to slow down, reflecting global tariff uncertainty, Malaysia is still likely to register a trade surplus for the foreseeable future.
“Electronics and semiconductor shipments are likely to remain a key driver, reflecting increased investment in this area in recent years and the fact that there are relatively few alternative suppliers and limited US re-onshoring capabilities.
“There are some questions over commodity exports, notably palm oil, as raw material prices generally have come under pressure given weakening global growth,” Neumann added.
The country’s exports last month declined 1.1% year-on-year (y-o-y) as opposed to April’s rise of 16.4%. The figure for May came in below the expectations of economists, as weak regional demand overshadowed ongoing front-loading activity mainly from the United States, Taiwan and South Korea.
The decline in exports, coupled with the rise in imports, sharply narrowed the trade surplus in May to RM766.3mil. The trade surplus was down 92.3% on a y-o-y basis and shrank 85.2% month-on-month (m-o-m).
Exports of electrical and electronics (E&E) products continued to show a resilient performance, registering an increase of nearly RM4bil – consistent with the World Semiconductor Trade Statistics forecast of an 11.2% increase in global semiconductor sales in 2025.
OCBC senior Asean economist Lavanya Venkateswaran said domestic demand would still be the anchor of growth.
“Domestic demand contributed 6.1 percentage points (ppt) to headline GDP growth of 5.1% in 2024. This year, we forecast this contribution to narrow to 4.6 ppt but this will still be the main contributor to growth for 2025.
“Our 2025 GDP growth forecast remains unchanged at 4.3% y-o-y, which suggests a relatively stable growth trajectory for the remainder of the year.
“However, the risks to our forecast are clearly to the downside from uncertainties associated with reciprocal tariff negotiations, mixed incoming economic data and potential subsidy adjustments,” she noted.
The 90-day US reciprocal tariff pause is set to be lifted for Malaysia on July 9. On April 9 this year, the United States administration announced a 90-day postponement of the individualised reciprocal tariffs for most countries while maintaining the baseline tariff of 10% on these countries without a specified end date.
Lavanya said for the Malaysian economy, the biggest direct risk is a higher reciprocal tariff rate imposed on exports to the United States, which would increase the effective tariff rate for US exports and reduce export demand.
This will have a near-term hit to growth, considering the United States accounted for 13.2% of total export share in 2024, she said. “However, the Malaysian authorities are building economic resilience through reforms.
“Sustained efforts to bolster investment spending, develop longer-term priorities to spatial distribution of economic benefits, sharper links between education outcomes and wages, as well as focused fiscal consolidation are some examples of medium-term reforms,” she said.
Lavanya said Malaysia’s trade surplus would be more volatile in 2025 compared to past years, as the frontloading of exports to the United States will unwind when tariff rates are confirmed, causing sharp gyrations in export growth.
This will mainly impact export volumes, she added.
Turning to the price effects, she said the terms of trade is expected to be modestly more favourable in 2025 compared to 2024. She said liquefied natural gas exports would benefit from higher prices and imports from weaker petroleum prices.
These should more than offset weaker prices for key exports such as palm oil and rubber, she said.
MARC Ratings Bhd chief economist Ray Choy said while the external economic scenario remains dicey, 62% of Malaysia’s economy is domestically driven by private consumption.
Nonetheless, he said exports are the key to significantly raise Malaysia’s GDP growth above trend due its importance to the jobs market and Malaysia’s international trade openness.
“Therefore, if the war between Israel and Iran for example worsens, Malaysia will maintain a sturdy base level of growth but have sharply curtailed benefits from the external sector,” he noted.
Delving into the geopolitical risks, he said the possibility of a further geopolitical flare-up remains likely as the Israel-Iran truce is fragile since the attack had degraded rather than obliterated Iran’s nuclear capabilities.
Furthermore, he said the ongoing decentralised militant operations by Iran-backed groups such as Hamas and the potential escalation of the war to other countries in the Middle East further limits hopes for a quick end to geopolitical tensions, even if they recede temporarily.
“What this means for the oil market is further volatility and the possibility of higher oil prices over time, especially given its currently low base below US$70 per barrel.
“Overall, Malaysia exports crude oil and other hydrocarbons such as natural gas, hence there could be some minor gains particularly with the expected reduction of fuel subsidies given these unfortunate geopolitical developments,” Choy said.
However, he said apart from the direct effects on the oil and gas sector, the greater risk is the possibility of disruptions to the Strait of Hormuz, or in a worst-case scenario, a complete closure.
Should this worst-case scenario occur, he said oil prices may spike by 50%, which would cause an energy crisis in some countries, severe global supply chain disruptions, food shortages and civil unrest in the Middle East.
“Given the potential costs of such a scenario, global governments will have significant interest to safeguard the Strait of Hormuz. As such, the baseline scenario is for market worries and geopolitical conflicts to raise commodity prices from time to time, but not toward extreme scenarios,” Choy noted.
Touching on the impact of the US tariffs and its effect on Malaysia’s trade, he said after July 9, reciprocal tariffs imposed by the US would return, and while Malaysia would unlikely experience the highest level of tariffs, its trading partners would be affected which in turn would dampen global trade.
Furthermore, he said the 10% baseline tariff would be persistent and adversely affect global trade on a structural level.
“A mitigating factor is that the United States has been careful in imposing excessive tariffs, especially on strategic sectors such as semiconductors. Alongside rising technology investments, semiconductor exports will remain robust, while oil and other hydrocarbon exports will be sustained due to the price effects of geopolitical conflicts.
“Palm oil prices have trended up, supported by both higher volume and higher prices. Taken together, Malaysia will likely maintain a trade surplus in 2025, although smaller than in 2024, partly driven by an increase in imports of capital goods given ongoing investments,” Choy said.
