KUALA LUMPUR (July 18): Economists have remained cautious on Malaysia's growth prospects for the remainder of the year amid global trade headwinds and domestic policy reforms, despite the advance gross domestic product (GDP) estimates for the second quarter of 2025 (2Q2025) expanding faster than expected.
Advance estimates from the Department of Statistics Malaysia showed GDP rising 4.5% year-on-year (y-o-y) in the April-June period, marginally above the 4.4% growth recorded in 1Q2025 and beating the Bloomberg median forecast of 4.2%.
While economists acknowledged the resilience of domestic demand, particularly in the services sector, they warned that growth momentum may taper off in the second half of the year (2H2025) due to waning external demand, softer manufacturing activity, and the lagged effects of fiscal reforms.
Frontloading boost fades as external risks build
OCBC Global Markets Research described the latest data as “mixed”, citing that the robust services sector masked underlying weakness in manufacturing and exports.
“We view the data releases today as mixed despite the stronger-than-expected headline 2Q2025 GDP print. The data suggests that external demand is weakening even amid better domestic demand conditions,” it said in a note on Friday.
The research house maintained its GDP growth projection to average 3.9% y-o-y in 2025, suggesting a sharp slowdown in growth to 3.5% in 2H2025 from 4.4% in 1H2025.
"This slowdown is largely premised on the payback from frontloading activities to the US and slowing domestic demand conditions. We estimate that US$2.5 billion (RM10.6 billion) of exports per month were frontloaded from October 2024 through May 2025; the effects of this frontloading fading are already visible in the June data," it said.
OCBC highlighted that electrical and electronics (E&E) exports — a key driver of trade — saw growth decelerate sharply to 1.3% in June from 7.1% in May. Meanwhile, export growth to the US moderated to 4.7% in June from 16.1% previously, indicating that frontloading activity has likely run its course.
Broader support from construction investments
While frontloading activities amid tariff uncertainty played a role — especially in the manufacturing sector where E&E exports to the US remain temporarily exempt from tariffs — HSBC Global Research stressed that the support extended beyond trade.
“We have long flagged the investment boom that Malaysia has been experiencing since 2024. The momentum continued in 2Q2025, leading the construction sector with double-digit growth for the sixth consecutive quarter.”
Still, HSBC warned of challenges ahead, as unprecedented uncertainty continues to weigh on Malaysia’s growth in 2H2025. It cited ongoing US trade negotiations, potential sectoral tariffs on semiconductors, and the lagged impact of Malaysia’s expanded sales and service tax (SST), effective July 1.
The research house expects full-year growth of around 4.2%.
Geopolitical and domestic policy changes weigh on outlook
UOB Global Economics and Markets Research similarly cautioned that the upbeat 2Q2025 figure may not be sustained going forward.
“Despite a stronger advance GDP growth for 2Q2025 and a preliminary average growth of 4.4% for 1H2025, we keep our cautious view for 2H2025 given persistent tariff risks, geopolitical tensions and the implementation of the domestic fiscal reform agenda,” it said.
The bank expects GDP growth to dwindle to around 3.6% in 2H2025, taking full-year growth to 4.0%, compared with 5.1% in 2024.
It also flagged recent developments in the US tariff tension, noting that the Trump administration's higher levy of 25% on Malaysian goods could erode the country’s export competitiveness compared to peers like Vietnam (20%) and Indonesia (19%).
Domestically, UOB warned that businesses face rising cost pressures due to a wider SST, higher electricity tariffs, and the new mandatory Employees Provident Fund (EPF) contributions for foreign workers — all of which may crimp investment and consumer spending.
Investment still supported by digital and infrastructure push
On the investment front, ANZ Research noted that approvals rose in 1Q2025, led by the services sector, while manufacturing approvals declined.
"We expect gross fixed capital formation to remain supported by ongoing investments in the digital economy and data centres, though this may not fully offset the drag from weaker domestic and external demand," it said.
While Kenanga Research also expects a slight moderation in 3Q2025, partly due to tariff effects and trade headwinds, it noted that "resilient private consumption, robust services activity, a low unemployment rate, and rising tourist arrivals should help cushion downside risks".
Nomura Global Markets Research meanwhile is relatively more bullish, maintaining a full-year GDP growth forecast of 4.4% — the highest among major institutional estimates and well above the consensus projection of 4%.
The research house sees strong public and private sector investment — particularly through structural reforms, infrastructure projects, and initiatives like the Johor-Singapore Special Economic Zone (JS-SEZ) — as a key driver of sustained growth.
While acknowledging export-related headwinds, Nomura believes Malaysia’s position in the global chip supply chain offers a buffer.
“We think tech exports could provide some offset, given the global chip cycle showing Malaysia’s electronics export growth, which lags by six to eight months, should be sustained in the near term.”
Economists split on further monetary easing
Following Bank Negara Malaysia's (BNM) overnight policy rate cut to 2.75% earlier this month, UOB and OCBC left the door open for another 25-basis-point (bps) rate cut this year, should risks to growth intensify.
The Monetary Policy Committee will next meet on Sept 3-4, and the final meeting of the year is slated for Nov 5-6.
However, ANZ and Nomura do not anticipate further easing as BNM is seen to only implement back-to-back rate cuts during periods of major economic shocks such as the Global Financial Crisis and the Covid-19 pandemic.
"We believe the recent pre-emptive 25bps cut by BNM does not signal the start of an easing cycle, and the bar for another cut appears high, given BNM’s assessment of the growth outlook is still relatively optimistic, which is likely reinforced by the 2Q GDP flash estimate," Nomura said.
The final GDP data is scheduled to be released on Aug 15.