KUALA LUMPUR: UBS Investment Bank forecasted a 4.5% year-on-year growth for the Malaysian economy this year as domestic demand and secular inflows of investments are expected to offset a slowdown in exports amid the tariff threats by the US.

The investment bank’s senior Asean and Asia economist Grace Lim suggested that while exports growth could slow down, domestic demand in Malaysia will continue to be an anchor of the economy, supported by positive real wage growth.  The bank's forecast is at the lower band of the official target of 4.5-5.5% in 2025.

“After a stronger than trend increase in 2023 and 2024, the pace of consumption growth could slow, but remain supported by positive real wage growth and low unemployment rates. And as minimum wages rise and fiscal policy turns more progressive, including civil service wage hikes, consumption should be fairly resilient,” said Lim in a virtual briefing.

The economist forecasted that domestic consumption is going to grow at a rate similar to the overall growth of the gross domestic product (GDP).

Malaysia recorded a GDP growth of 5.1% in 2024, with domestic demand expanding by 5.3%, driven by private sector expenditure, which grew by 5.6%. Private consumption, supported by improvements in the labour market and robust household spending, grew 5.7% y-o-y in 2024. Meanwhile, public sector expenditure increased by 4.1% during the year.

US President Donald Trump’s threats on tariffs is certainly a risk for the entire Southeast Asian region, said Lim. However, she highlighted that there are multiple axes of risks, depending on certain criteria, and that trade surplus with the US is not the only factor.

“At the end of the day, it’s unclear whether or not trade balances are going to be the only dimension, whereby the US considers where they impose tariffs. The bottom line is, the risk is there, and I think countries have already started to think along the lines of how best to mitigate those risks.

“But we think that ultimately right now it might be too early to conclude which countries are most at risk, because we are not sure what the criteria is for trade tariffs,” said Lim, saying that the risk profile on trade tariffs for Asean in general may not be as high as other larger economies with an even larger trade surpluses with the US.

According to the US Census Bureau, China, Mexico and Vietnam are the top three countries with trade surpluses against the US, while Malaysia being 14th on the list with a trade surplus of US$24.8 billion in 2024.

Among Southeast Asian countries, Malaysia’s trade surplus with the US is the third largest, behind Thailand with a surplus of US$45.6 billion in 2024, and Vietnam, which exported US$123.5 billion more goods than it imported from the US last year.

“If trade balances are the key input for US tariffs, there are specific risks potentially for Vietnam, Thailand and Malaysia due to their trade surpluses with the US. However, even in that scenario, country specific tariffs are unlikely to be imposed on Asean prior to other larger economies with higher risk profiles,” said Lim.

While it is still uncertain that country-specific tariffs are going to be imposed on ASean countries — Malaysia included — by the Trump administration, the region stands to benefit from supply chain shifts, said Lim.

Regardless of the extent of tariffs eventually imposed, supply chain shifts should persist amidst a clear risk of escalating trade tensions, she said.

“It is our basic premise that intra-Asian trade would deepen as countries seek new export markets and diversify sources of production. This would prove supportive for supply chain shifts and for the manufacturing sector in general, even in a new tariff landscape,” said Lim.

She added that supply chain shifts should be accelerated for countries best poised to gain from escalating trade tensions globally, of which within Asean, are Vietnam, Malaysia and Thailand.

Should further US tariff announcements follow, open economy central banks could lean a bit more dovish and accommodate some currency weakness, said Lim.

“In addition, countries would also seek to lower the temperature when it comes to tariff risk, by perhaps importing more US products. Ultimately, we think that there is some space for fiscal policy and monetary policy to act as some buffers in the case of a weakening growth outlook,” she said.

The investment bank expects that Bank Negara Malaysia (BNM) will hold its policy rate unchanged at the current level of 3%, as there is no intense pressure for the central bank to ease its monetary policy given the solid growth outlook for this year.

However, UBS Investment Bank forecasts a potential two rate cut by BNM next year, said Lim.

On the ringgit, the investment bank’s official forecast is that the currency could reach RM4.60 to the US dollar by the end of the year, which would be a pretty managed depreciation, in line with other currencies across the region.

“Similar to most of the other economies, I would say that the potential for managed or moderate weakening of currencies, if trade escalation intensified meaningfully, is there,” said Lim.