This article first appeared in The Edge Malaysia Weekly on February 17, 2025 - February 23, 2025

THE Malaysian economy wrapped up 2024 expanding at a decent pace of 5.1%, within the higher end of official projections of 4.8% to 5.3%. It was also significantly better than the 3.6% recorded in 2023.

In general, economists project a similar growth pace this year, although they caution that US President Donald Trump’s trade policies may negatively impact Malaysia’s exports. As such, domestic demand must play an even more important role in maintaining the momentum, given that in the fourth quarter (4Q) of 2024, gross domestic product (GDP) growth had slowed for the second consecutive quarter, expanding 5% year on year (y-o-y). Prior to that, 3Q had registered revised growth of 5.4% from 5.9% in 2Q and 4.2% in 1Q.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie cautions that domestic demand must continue to be the growth driver this year, as the Trump administration’s policies may have an impact on Malaysia’s exports.

“At SERC, we are still maintaining 5% growth this year. There was some softening of some of the components. We are hopeful of private investments, because we believe that we are still in a multi-year private investment expansion cycle, supported by the approved investments, ongoing investments, regardless of semiconductor, data centre or other sectors,” he tells The Edge.

Similarly, ANZ Research, which has a lower 2025 GDP growth forecast of 4.5%, highlights that the onus of growth will shift to household consumption this year.

“Though it may not accelerate further, it is likely to remain steady. The labour market remains resilient, with the unemployment rate of 3.1% at its lowest since 2015. Moreover, the government’s policies are supportive of consumption. Recalibration of civil servant salaries and upward revision of the minimum wages economy-wide will offer considerable support,” it said in a note last Friday.

ANZ cautions, however, that there are already early signs of a potential moderation this year.

“Nominal trade data showed softer growth in intermediate and capital goods imports, pointing to a potential moderation in both exports and investment. The new export orders component of Malaysia’s manufacturing PMI (Purchasing Managers’ Index) has been below the neutral mark in the last two months. We also suspect that uncertainty over trade policies and a maturing tech cycle will also weigh on capex (capital expenditure) even though investment approvals remain strong,” it notes.

ANZ thinks Malaysia’s capex cycle is peaking, following a 1.8% decline in investments on a quarterly basis, though annual growth was still solid at 11.7%. “This also ties in with the business approvals and foreign capital investment data, both of which have started to slow,” it explains.

Meanwhile, HSBC Global Research sees more room for trade to improve, as net exports’ contribution to growth was minimal. “This also echoed the manufacturing performance, as industrial production saw only a modest rebound in 2024,” it says.

ANZ points out, however, that Malaysia has seen a much slower recovery in semiconductor production than tech-exposed peers such as Taiwan and South Korea, partially suggesting a lagged recovery cycle along the tech supply chain for Malaysia. This may imply some near-term tailwinds on the trade front.

“Indeed, recent high-frequency trade data has indicated a strong pick-up in electronic export momentum, though it was weighed down by commodity exports,” it says, noting that it is still subject to global trade prospects.

Sunway University Business School professor of economics Dr Yeah Kim Leng also believes global uncertainties will weigh on consumption and investments.

“Global uncertainties have increased, further exacerbated by concerns over Trump’s policies. The trade war will escalate. For now, it is still confined to a few countries, but we know Trump may widen the tariffs to all its trading partners … With higher tariffs, consumption is likely to weaken and then investment activity will slow down.”

Trump has announced a slew of tariffs since taking office early this year as US president — his second term — the latest being a 25% tariff on all steel and aluminium imports into the US. There are also plans to impose reciprocal tariffs on every country taxing US imports.

On the other hand, Yeah observes that easing geopolitical tensions, such as a peaceful settlement to the Russia-Ukraine war and a permanent solution to the Gaza conflict, could offset some of these negative impacts on the global front.

He expects Malaysia’s GDP growth to be at the upper end of his 4.5%-5% projection, on the back of a sustained investment momentum, given the huge pipeline of investment projects in the country and increased production capacity.

Bank Negara Malaysia governor Datuk Seri Abdul Rasheed Ghaffour highlighted that the key growth pillars for 2025 would be resilient domestic expenditure and improvement in external demand.

In a statement last Friday, he said local investment activities would be driven by the favourable progress of multi-year projects in both the private and public sectors and further lifted by the realisation of approved investments.

“Household spending will benefit from the continued support from employment and wage growth as well as government policy measures. This includes the upward revision of the minimum wage and civil servant salaries.” On the external front, he said exports could be lifted by the ongoing global tech upward cycle, continued growth in non-electrical and electronic goods and higher tourist spending.

Overall, potential upside to growth includes greater spillovers from the tech upward cycle, more robust tourism activities and faster implementation of investment projects. Nonetheless, the downside risks include an economic slowdown in major trading partners amid the heightened risk of trade and investment restrictions and lower-than-expected commodity production. Meanwhile, the Department of Statistics Malaysia said the economy in 2025 would be driven by strong labour market conditions, robust exports in the electrical and electronics sector and the implementation of key investment initiatives.

Private consumption, in particular, is expected to be boosted by the minimum wage hike to RM1,700 starting this month; Public Service Remuneration System (SSPA) salary adjustments, with a RM10 billion allocation; and the Progressive Wage Policy, with a RM200 million allocation benefiting 50,000 workers.

Abdul Rasheed said in the medium term, the local currency will be supported by the country’s positive macroeconomic prospects and the ongoing implementation of structural reforms.

As at last Wednesday, the ringgit had gained 0.1% against the US dollar since the start of the year, but depreciated 0.03% on a nominal effective exchange rate (NEER) basis against Malaysia’s major trading partners.

On the inflation outlook, Abdul Rasheed says easing global cost conditions and the absence of excessive domestic demand pressures will help contain inflation this year, despite the potential upward pressure on prices due to domestic policy reforms. “Nevertheless, upside risks could arise from larger cascading effects from policies to broader CPI (Consumer Price Index) prices,” he cautions. Economists have warned that inflation may gradually rise from the middle of the year, owing to subsidy rationalisation, tax adjustments and wage increases. In 2024, both headline and core inflation declined to 1.8% from 2.5% and 3% in 2023 respectively.

Manageable inflation and sustained economic growth prompted the central bank to maintain the benchmark interest rate at 3% last month — a level unchanged since May 2023. Yeah sees a gradual rise in inflationary pressure this year as global oil prices remain soft. Brent oil has been flat this year, trading at US$75 a barrel as at 5pm last Friday. As such, he expects adjustments to the Overnight Policy Rate this year but does not rule out the possibility of monetary easing if economic growth weakens sharply.

Lee foresees a higher inflation rate of 2.5% to 3% this year, owing to the effects of the potential RON95 subsidy rationalisation, higher electricity tariffs and wage increases. 

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