This article first appeared in Forum, The Edge Malaysia Weekly on January 27, 2025 - February 2, 2025

First, let’s take a broad overview of the state of the economy in 2024.

All in all, Malaysia’s macroeconomic performance in 2024 has been impressive, although slowing in the fourth quarter. With gross domestic product (GDP) growth rates reaching 5.9% in the second quarter and 5.3% in the third quarter, the expectation is for the fourth quarter to maintain a growth rate above 4.8%. This would result in a full-year growth forecast of 5.1%, surpassing the earlier projection of 4% to 5% set by Bank Negara Malaysia. Several factors have contributed to this robust performance, with strong consumer demand being a key driver. Higher wage growth and a lower unemployment rate of 3.2% — the lowest since January 2020 — have supported purchasing power and consumer spending. Additionally, the tourism sector has seen a strong recovery, buoyed by the visa-free arrangements with China and India, which have led to a marked increase in tourist arrivals during the second half of the year.

The semiconductor industry also experienced a significant uptick in the latter part of the year, benefiting from the global semiconductor upward cycle that finally reached the downstream segment of Malaysia’s semiconductor supply chain. This has reinforced the country’s position as a critical player in the global electronics and technology sector. On the inflation front, Malaysia has maintained price stability, with inflation remaining low at 1.8%, further supporting consumer confidence and economic resilience. The ringgit has strengthened against the US dollar, aided by the central bank’s currency forward strategy, which has improved the currency’s stability and appeal to investors.

In addition to these factors, Malaysia has also witnessed a surge in initial public offerings, with 55 IPOs last year — the highest number in 19 years. This has made Malaysia the leading Association of Southeast Asian Nations (Asean) country in terms of IPO activity in 2024, signalling strong investor confidence in the Malaysian market and highlighting the country’s growing appeal as an investment destination.

Despite the strong economic performance of 2024, 2025 will be a turbulent year.

On a positive note, the country’s economic growth is likely to remain strong in the first quarter of 2025, driven by the realisation of investment pledges made in 2024. These commitments are likely to materialise this year to drive continued industrial expansion. The influx of investments is expected to stimulate the manufacturing sectors, fostering innovation, increasing production capacities and creating numerous employment opportunities.

A key development that will drive economic prospects in the early part of 2025 is the signing of the Johor-Singapore Special Economic Zone (JS-SEZ). This landmark agreement will unlock new avenues for both domestic and foreign investments, particularly in high-value sectors such as technology, manufacturing and biotechnology. The JS-SEZ will enhance cross-border collaboration, streamline regulatory processes between the two administrations and provide supporting infrastructure, making it an attractive destination for multinational corporations and start-ups alike.

Malaysia’s role as chair of Asean in 2025 will elevate its regional standing. This leadership position places the country as the central hub for Asean’s growth and development initiatives, enabling it to influence key policy directions and foster deeper regional integration. Under Malaysia’s chairmanship, Asean is expected to prioritise initiatives that promote increased trade, strategic partnerships and large-scale infrastructure projects across Southeast Asia. This expanded regional cooperation is likely to attract further investments, facilitate the movement of goods and services and strengthen economic ties among member states, thereby amplifying Malaysia’s economic impact within the region.

The convergence of these positive factors creates a powerful economic momentum that is projected to extend well into 2025 and beyond. This sustained growth is expected to generate a positive long-tail effect, where the benefits of current investments and strategic initiatives continue to ripple through the economy.

That said, there are many signs of risks and uncertainties, stemming both from external and internal pressures.

One of the foremost external challenges stems from the geopolitical landscape, particularly the implications of the Donald Trump presidency on global markets. Trump’s expected protectionist policies will introduce new turbulence, with Malaysia not entirely insulated from the threat of tariffs imposed by the US. This situation is further complicated by Malaysia’s strategic pivot towards aligning with alternative global powers, including nations within the Global South. While diversifying alliances can mitigate dependence on Western economies, it also risks provoking retaliation from established Western partners.

Secondly, the manufacturing sector in Malaysia will likely face a potential slowdown, influenced by shifts in global demand patterns. In anticipation of policy changes under the Trump administration, companies have frontloaded their orders, leading to a temporary surge in production in the last two months that is unlikely to sustain after Trump’s inauguration. Consequently, the electronics and electrical industry, which showed strong growth in the latter half of 2024, is expected to experience a subdued performance this year.

Compounding this issue is the US’ imposition of restrictions on advanced chip exports and technology transfers in January. Malaysia is classified as a Tier-2 country, which means that our access to advanced chip manufacturing and exports will be limited. This limits the ambition to move from downstream manufacturing to higher-value semiconductor manufacturing.

On the domestic front, Malaysia will face economic adjustments with the upcoming rationalisation of the RON95 fuel subsidy. The removal or reduction of this subsidy is expected to impact consumer spending as fuel prices rise, thereby moderating overall consumer demand. The consumer market, which was a key driver of GDP growth in 2024, may experience a slowdown as households adjust to higher fuel costs and reduced disposable income.

Furthermore, economic indicators present a mixed picture. Wage growth is projected to reach 5% this year, which, while positive, is tempered by an anticipated inflation rate of 2% to 3.5%. This results in real wage growth hovering between 1.5% and 3%, effectively limiting the purchasing power of consumers. The constrained real wage growth is likely to place a cap on the expansion of the services sector, which was expected to grow by 5.3% in 2024 but may see slower growth this year.

Short-term economic volatility is an inherent aspect of the economic cycle, and Malaysia is no exception. As we strive to sustain the momentum achieved during the peak of 2024, the interplay of global dynamics and domestic challenges is expected to persistently influence the country’s economic landscape in 2025. To navigate these turbulent times, moving forward, we must press forward in long-term-oriented policymaking rather than relying on short-term indices, but at the same time, taking advantage of existing strengths and opportunities to build sustainable growth ahead.

A sustainable growth trajectory requires a well-defined road map, anchored by strategic national plans such as the upcoming 13th Malaysia Plan and the Malaysian Education Blueprint. These frameworks must lay the foundation for growth and development over the next five to 10 years, ensuring that policies translate into tangible outcomes rather than remaining mere on-paper promises. Effective implementation demands meticulous planning and execution.

Malaysia’s upcoming economic development initiatives, including the Data Centre Road Map and the Rare Earth Elements (REE) Development Framework, must be strategically designed to address both opportunities and challenges presented by the current economic and global landscape. These plans should emphasise the importance of public-private partnerships, ensuring that collaborative efforts maximise outcomes and drive innovation.

For Malaysia to achieve its economic ambitions, the government must also demonstrate a commitment to meaningful reforms and enhance federal-state cooperation. Accountability in fiscal consolidation is essential, necessitating the implementation of necessary yet potentially unpopular reforms such as subsidy rationalisation and the optimisation of tax structures. Global investors will be keenly observing Malaysia’s commitment to improving its fiscal health, including reducing its debt level and fiscal deficit. Additionally, empowering local and state governments to take an active role in their respective regions will be important moving forward to ensure that economic clusters operate efficiently and effectively. This decentralised approach promotes tailored development strategies that address unique regional needs, fostering balanced national growth.

Externally, Malaysia should continue to strengthen its diplomatic relations and enhance bilateral and multilateral partnerships. The successes of 2024, marked by secured trade and investment from Germany, New Zealand, Singapore and China, underscore the importance of international alliances. In January, the reinforcement of economic ties with Japan, which has pledged increased investment in Malaysia’s priority sectors, exemplifies the positive outcomes of strategic diplomacy. Building on this momentum, Malaysia must leverage its unique position as the Asean chair to exert greater influence within the region and expand Asean+ relations.

As Asean chair, Malaysia is uniquely positioned to unify member countries in addressing key geopolitical and geoeconomic challenges, including crafting a cohesive response to the US-China trade rivalry. This leadership role provides an opportunity to enhance Asean supply chain connectivity, harmonise trade systems and negotiate increased investments based on the robustness of the regional supply chain. By doing so, Malaysia can position itself as a market leader in critical global sectors such as semiconductor manufacturing, sustainability and green transition initiatives, and the halal food industry.

A thriving economy is underpinned by a conducive business environment, open trade policies, high institutional quality and accommodative industrial policies. Malaysia must prioritise improvements in these areas to build a strong economic foundation that can withstand volatility. Enhancing trade openness and simplifying regulatory frameworks will attract foreign investments and stimulate domestic entrepreneurship. Additionally, maintaining high standards of institutional quality is very much needed. This involves more transparency and accountability in its governance structure.

Malaysia stands at a pivotal juncture, where strategic, long-term policymaking must intersect with the exploitation of current strengths and opportunities to forge a path of sustainable growth. By focusing on comprehensive economic development plans, fostering federal-state cooperation, strengthening international ties, leveraging Asean leadership and enhancing the business environment, Malaysia can navigate the complexities of global and domestic challenges.

In 2025, concerted efforts will not only sustain economic momentum but also secure Malaysia’s position as a resilient and dynamic economy in the global arena.

Doris Liew, an economist and public policy thinker at Ideas Malaysia, regularly observes Asean’s economic development, policy frameworks and regional and international trade dynamics

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