KUALA LUMPUR (Jan 1): Malaysia’s economy is widely expected to expand within the official forecast of 4.5%-5.5% in 2025, but a number of external factors may derail the print.

MIDF Research has pegged Malaysia’s gross domestic product (GDP) growth to moderate slightly to 4.6% next year (2024: 4.8%-5.3%). Consumer spending remains the growth engine, while private investments will add to the momentum as well.

“Conditions in the job market remain encouraging as more people enter the job market with labour force participation hovering at a high level of 70.5% as of October 2024,” MIDF said in its 2025 outlook report.

“Apart from growing employment and income, continued cash assistance from the government, hikes in civil servant salaries and a continued rise in tourist arrivals will support consumption spending next year,” it added.

The Ministry of Finance's official projection for Malaysia’s economic growth for 2025 eclipses the International Monetary Fund’s GDP growth forecast for emerging markets and developing economies of 4.2%.

However, economists have highlighted a number of external uncertainties that may derail the forecasted outcome. At the top of the list are geopolitical risks in the Middle East as well as US President-elect Donald Trump’s much-touted aggressive trade policies.

Further escalation of conflict in the Middle East may disrupt critical oil and gas supplies, leading to volatile commodity prices and supply chain vulnerabilities, according to Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

“Risks of volatile commodity prices, namely crude oil, and possible disruptions to global supply chains would lead to heightened uncertainties,” he told The Edge.

Meanwhile, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie sees the downside risk on Malaysia's trade performance. He cautioned that Trump's protectionism policy on imported goods will potentially weigh on Malaysia's exports.  

He reckoned the first quarter of 2025 may be a key turning point to see whether Trump's policy announcements were just campaign rhetoric or implementation.

“The first quarter of 2025 (1Q2025) will be a key turning point to see whether Trump’s policy announcements were mere campaign rhetoric or implementation will be realised,” Lee explained. He forecasted Malaysia’s GDP to grow by 5% in 2025, citing strong domestic spending and continued implementation of Malaysia’s various national masterplans.  

Besides implications on trade, more pertinently, Trump’s proposed policies — which also include a mass immigrant deportation plan — also potentially weigh heavily on US inflation, and in turn the US Federal Reserve’s (US Fed) monetary policy.

Uncertainty over Trump’s policy proposals led to the US Fed raising inflation estimates for 2025, and signals for a possible slowdown in its Federal Fund Rate (FFR) easing.

The US monetary policymaker’s more hawkish tone led consensus forecasts for the US interest rate to expect one less 25-basis-point cut in 2025 — to three 25-basis-point cuts to 3.5%-3.7% from four 25-basis-point cuts to 3.25%-3.5%. Against the FFR’s current 4.25%-4.5%, there is a 125-150-basis-point differential to Malaysia’s overnight policy rate (OPR) at 3%.

As for Bank Negara Malaysia, economists widely expect the central bank to maintain OPR at 3% for the whole of 2025 given the absence of excessive demand price pressures and Malaysia’s cautiously optimistic economic growth outlook.

Domestically, economists expect inflation to trend upwards in line with the official forecast of 2%-3.5% in 2025 from 1.5%-2.5% this year.   

CIMB Securities projects the consumer price index to stand at 2.6% in 2025 owing to the government’s planned RM200 minimum wage hike, expanded sales and service tax coverage to include non-essential items and RON95 petrol subsidy rationalisation.

“The planned minimum wage hike and fuel price adjustment draw parallels to 2013, when the minimum wage policy was first introduced and retail fuel prices were raised. During that period, diesel prices increased by 20 sen per litre (11.1%), RON95 by 20 sen per litre (10.5%), and RON97 by 15 sen per litre (5.6%).

“Despite these adjustments, headline inflation remained relatively modest at 2.1%,” the research firm said. However, it noted that a sharper rise in inflation could destabilise consumer sentiment and purchasing power.

Nonetheless, with the wider-than-expected final differential with the FFR, UOB expects the ringgit to weaken in the first three quarters due to rising safe-haven demand for the US dollar prior to gaining ground in 4Q2025.

UOB pegged the ringgit at 4.55 by end-2025 against the US dollar, compared to CIMB’s 4.35, RHB Research’s 4.24, Bank Muamalat and SERC’s 4.20, and MIDF’s 4.03. The ringgit was exchanged at 4.5078 against the greenback at the press time.  

At the equity market, the FBM KLCI ended its three-year streak of annual declines in 2024, gaining 13.02% to close at 1,642.33 on Dec 31. Over the past one year, the bellwether index rallied from a low of 1,446.36 on Jan 2, 2024 to a high of 1,684.68 on Aug 29 last year.

“There is room for further potential upside in 2025, possibly reaching the 1,750-1,800 level by end-2025,” said Fortress Capital founder and CEO Datuk Thomas Yong, adding the optimism is driven expectations of sustained earnings growth, strong economic momentum, and potential foreign fund inflows due to attractive valuations and a strengthening ringgit.

Yong noted that external uncertainties like geopolitical tensions, Trump’s tariff policies and global monetary policies may cause intermittent volatility. However, improved infrastructure spending, particularly in data centres, rising consumption due to higher wages and increased foreign direct investments into high-growth sectors like technology and construction are expected to continue to underpin market resilience.

Sector-wise, he said the bellwether index is expected to be spurred by construction counters benefiting from infrastructure and data centre projects; utilities seeing gains from rising demand alongside investments in renewable energy and data centre development; plantation, driven by strong palm oil demand and stable crude palm oil prices; and banking, poised to grow due to healthy loan growth, rising consumption and capital market activities.

“The potential risks that could hinder the index's performance come particularly from the oil and gas heavyweights, where companies might face challenges from Petronas’ capital expenditure adjustments, lower oil prices, or continued weak demand from China.

“Additionally, geopolitical tensions, prolonged US-China trade disputes, any unexpected policy changes under a second Donald Trump presidency, and unexpected regulatory changes in Malaysia are also risks that may upset the KLCI’s upside,” he added.

Apex Securities head of research Kenneth Leong also sees further upside to the KLCI, citing its forward price-to-earnings ratio of 13.7 times being below the historical five-year average of 16.7 times.