This article first appeared in The Edge Malaysia Weekly on May 26, 2025 - June 1, 2025

NOT to state the obvious, but the hope for better economic growth this year relies largely on favourable outcomes from the trade negotiations with the US and a de-escalation of trade tensions.

Following the lower-than-expected first quarter gross domestic product (GDP) performance of 4.4% that was announced two weeks ago, four more research houses revised downward their full-year forecast for Malaysia’s economic growth, citing trade uncertainties.

Most of those who kept forecasts unchanged following the 1Q2025 GDP release already expect this year’s GDP growth to come in below the official forecast of 4.5% to 5.5% announced last October by Bank Negara Malaysia, which expects to revise it in the next two months.

The current estimated GDP growth for 2025 among the 13 research houses viewed by The Edge average at 4.2%.

Economists say the chance of growth for the year coming in above their estimates to land at the lower range of the official forecast of 4.5% would depend on the tariff situation that is plaguing not just Malaysia, but countries around the globe.

“The risks to the GDP growth forecast are from escalating trade tensions between the US and the rest of the world. On the upside, if Malaysia can negotiate down reciprocal and sector-specific tariffs, that could be a boost to growth,” says OCBC senior Asean economist Lavanya Venkateswaran in a reply to The Edge.

A swift resolution to the trade negotiations that is in Malaysia’s favour would definitely be a plus point for the country’s economic growth as it provides certainty and eases trade pressure, reducing the spillover impact to domestic demand, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-Economic Research Centre (SERC).

However, he highlights that there is still a high risk of the US falling into a recession, while China’s growth remains challenging.

Lee puts a 35% chance of GDP falling below 4% this year, saying the strength of consumer spending and private investments are the wild cards to ensure that the economy would not slip below 4%.

While showing signs of moderation, consumer demand held up the 1Q2025 GDP as private investments and exports slowed at a quicker pace. Private consumption grew 5% year on year (y-o-y) for the quarter, compared with 4Q2024’s growth of 5.3%.

What bears watching over the next few months is how the government plans to continue with its reform measures, especially on subsidies, amid the now uncertain trade outlook. The expansion of the sales and service tax (SST) is poised for gazettement in June, while there is also the much-anticipated petrol subsidy rationalisation that is scheduled to take place in the second half of the year.

These measures are expected to raise inflation, where its quantum would depend on how much of the subsidy is lifted and how widespread the expanded SST scope is. Subsequently, the potential cost pressure on consumers could mean a more measured approach to spending.

Inflation for April has come in at 1.4% y-o-y, unchanged from the previous month. Bank Negara forecast inflation to range between 2% and 3.5% for the year, but the number is due for revision in conjunction with the revised GDP number.

RHB Research says in a May 16 report that the downside risk of growth slowing to 3.5% to 4% appears limited, given the recent progress in the US-China trade talks. Nevertheless, it cautions against premature optimism, saying that risks may linger after July 8, when the 90-day pause of tariffs ends.

It is worth noting that among the 13 research houses, only RHB Research has left its growth projections for the year in line with the official forecast range, at 4.5%.

Unlike the economists, Bank Negara has decided to wait another one to two months before announcing its revised GDP growth numbers for the year.

Some think the central bank is too slow in making the revision, while others recognise the difference in weight accorded to an official forecast, especially by a respected institution like Bank Negara.

“I think Bank Negara’s decision is prudent. There are a lot of moving parts that are unconnected to economic fundamentals, generating an unusually high degree of uncertainty for forecasting. Moreover, most modelling work is currently scenario-based and releasing this publicly could raise more questions than answers,” opines Lavanya.

Lee says it is appropriate for the central bank to wait for Malaysia’s trade negotiations with the US to unfold for clarity sake before revising its growth estimates. “I think Bank Negara will likely revise the GDP growth forecast after the end of the 90-day reciprocal tariffs pause, by which time, we will have data points and information.”

Meanwhile, CGS International economist Ahmad Nazmi Idrus believes there is no reason to revise the numbers formally, although they might have internal estimates worked out, the reasons being the fluidity of the present situation and the revised outlook that usually takes place during the tabling of the federal budget in October.

This means a revision that comes in one or two months, which many speculate will take place after the 90-day reciprocal tariff pause, could be made redundant in a mere three months when the economic outlook for the year is tabled in Budget 2026.

However, across the Causeway, Singapore revised its GDP growth forecast for the year in April to the 0% to 2% range from 1% to 3%, citing the impact of tariffs on global trade.

In the 1Q2025 GDP announcement, front-loading activities of exports were highlighted. The front-loading intensified further in April, with exports jumping 16.4% y-o-y compared with March’s 6.8% growth.

The stronger surge in April exports was largely driven by higher shipment of electrical and electronic (E&E) goods, machinery, equipment and parts as well as optical and scientific equipment.

CIMB Securities notes in a May 21 report that the strong indication of front-loading was the surge in transshipment activity, with re-export growth increasing to 46% in April, from 12.1% in March.

“Although trade rebounded in April, the upswing was largely supported by the 90-day tariff pause, which triggered a front-loading frenzy as exporters rushed to ship goods ahead of any potential reinstatement of tariffs or breakdown in talks,” it adds.

Lee believes exports will continue to surge in the second quarter of the year before the 90-day reciprocal tariff pause ends in July. However, the effect is not expected to be long-lasting and economists say to expect some payback later on.

Even if the trade war de-escalates, Ahmad Nazmi says he is expecting exports to taper off after the front-loading activities.

“Business inventories will be full, if not already, which means they will be importing less. We expect this to happen as early as 2H2025,” he adds.

Lavanya points out that exports to the US have grown at rates much higher than in the recent past as a result of the front-loading activities and how the front-loading situation draws to an end in the coming months will depend on the outcome of the tariff negotiations.

“The front-loading could come to either an abrupt end, resulting in a sharp decline in exports after, or it could be a more gradual process, which means the peak-to-trough move could be more contained. These high levels of exports are unlikely to be sustained once tariff negotiations are finalised,” she says.

When it comes to exports, what is of concern for Malaysia is whether sector-specific tariffs will impact Malaysian exports. There have been news reports saying tariff rates for US trading partners will be announced over the next two to three weeks.

“Malaysia will be more impacted by the US’ levies on semiconductors under Section 232, if any, as E&E exports made up 40% of Malaysia’s total gross exports of goods. In 2024, Malaysia’s semiconductor exports to the US accounted for 23% of its total exports to the US,” UOB says in a May 20 report.

“Additionally, Malaysia is uniquely entrenched in the E&E supply chain, ranking the ninth largest E&E exporter in the world and the third largest source [in Asia] of electrical machinery to the US after China and Taiwan.”

The research house warns of potential supply shocks from China if the tariff war prolongs and re-escalates after the 90-day tariff truce.

“The World Trade Organization (WTO) warned in mid-April that the disruption in US-China trade is anticipated to trigger significant trade diversion and increased competition from China to third markets, including Malaysia,” it notes.

It adds that the surge in Malaysia’s re-exports in March and April could be emerging signs of increasing re-shipping through third countries to potentially avoid higher tariffs — potentially risking punitive measures imposed by the US on Malaysia. UOB has forecast export growth at 3.8% in 2025. 

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