External headwinds to weigh on Malaysia’s GDP growth in 2025

Published on 30 May 2025.

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The Malaysian economy grew by 4.4% in 1Q 2025, in line with the official advance estimate, underpinned by the continued expansion in domestic demand. However, growth momentum eased from the preceding quarters (4Q 2024: 4.9%; 3Q 2024: 5.4%) amid broad-based moderation across most sectors. While the manufacturing, construction and services sectors continue to expand at a healthy pace, growth in these segments slowed. Deeper contraction in the mining sector further weighed on overall growth. On the demand side, a sharp deceleration in net export growth to 19.6% (4Q 2024: 63.6%) also dampened headline GDP performance. 

Going forward, the global economic landscape is expected to be rather challenging in 2025 amid mounting trade uncertainty. The International Monetary Fund (IMF) projects global economic growth to slow to 2.8% (2024: 3.3%) while forecasting global trade growth to decelerate sharply to 1.7% in 2025 (2024: 3.8%) due to ongoing trade disruptions and weakening business and consumer sentiments. 

As a highly open economy, Malaysia will inevitably be affected by a slowdown in global trade and weaker economic growth among major trading partners, alongside direct repercussions from US import tariffs. RAM projects Malaysia’s GDP to grow at a more moderate 3.5%-4.5% in 2025, down from 5.1% in 2024. Despite the external challenges, growth will remain anchored by resilient domestic consumption, supported by a low unemployment rate and sustained wage growth. Domestic investment is also expected to remain robust, driven by the implementation of multi-year investment projects and national development initiatives.

The near-term risk to outlook remains tilted towards the downside, particularly from a potential escalation in trade tensions. The most significant risk to Malaysia’s overall trade performance stems from the possibility of targeted US tariffs on the E&E sector. The US is a key market for Malaysia’s E&E sector, accounting for about 20% of Malaysia’s overall E&E exports and 7.9% of the country’s total exports. That said, upside risk could emerge if trade tensions de-escalate or if Malaysia secures more favourable trade terms from the ongoing negotiations with the US. 

Over the longer term, Malaysia’s neutral stance and proactive efforts to foster broader trade partnerships and deepen intra-ASEAN trade and investments will support sustained growth. This commitment was reinforced at the 46th ASEAN Summit, where the leaders’ statement in response to global uncertainties included a pledge to leverage existing mechanisms like the ASEAN Plus One Free Trade Agreements to expand external partnerships. They also agreed to enhance internal coordination through initiatives such as upgrading the ASEAN Trade in Goods Agreement and establishing the new ASEAN Geoeconomic Task Force. 

Overall cost environment in Malaysia remains favourable, with headline inflation averaging at 1.5% in 1Q 2025 (4Q 2024: 1.8%). This provides the government with room to proceed with the necessary subsidy reforms and planned scope expansion of the service tax in 2H 2025. We project full-year inflation for 2025 to edge up to 2.0%-3.0% (2024: 1.8%), reflecting anticipated adjustments to petrol prices, electricity tariffs, and the broadening of the service tax regime. Nonetheless, we expect the overall inflationary pressures and the ensuing impact on overall spending from these policy rollouts to be manageable.

Read the full Quarterly Economic Update report here.

 

Analytical contact Tan Wan Ying (603) 2708 8251 wanying@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Woon Khai Jhek, CFA (603) 2708 8286 khaijhek@ram.com.my

 

 

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