Malaysia manufacturing 2H25 outlook hinges on US reciprocal tariffs

Malaysia’s manufacturing sector, long a cornerstone of its export-driven economy, is bracing for a challenging second half of 2025 amid geopolitical trade friction and softening global demand. Economists and policymakers warn that the looming US reciprocal tariffs—potentially locking in at 24%—could tip the sector into a slower growth trajectory, with knock-on effects for national GDP.

In the first quarter of 2025, manufacturing made up 23% of Malaysia’s gross domestic product, a slight decline from 23.1% in the same period the previous year. Industrial output has shown some resilience: April’s Industrial Production Index (IPI) rose 2.7% year-on-year, underpinned by a 5.6% gain in manufacturing. But the overall result fell short of expectations, with mining and electricity dragging down the composite figure.

The pressure stems from US trade actions initiated in April. On April 2, a 10% baseline import tariff was applied to all inbound goods. Just a week later, the US government expanded the measure to include reciprocal tariffs for trade partners, imposing a hefty 24% levy on Malaysian goods. While Washington announced a 90-day pause for negotiations with over 75 countries, Malaysia’s trade outlook remains unsettled. If talks fail, the higher rate could crystallize as early as Q3 2025.

Exporters are already feeling the chill. Although frontloading—an acceleration of exports ahead of anticipated trade restrictions—has buoyed recent figures, this tactic is unsustainable. “The tide could turn if tariffs are imposed on Malaysia’s exports to the United States,” said OCBC’s Senior ASEAN Economist Lavanya Venkateswaran. “A sharp downturn in exports in the 2H25 will likely weigh on investment spending as businesses remain on the sidelines.”

The Malaysian government had projected full-year GDP growth of 4.5% to 5.5%, following a 5.1% expansion in 2024. However, Lavanya cautioned that 2H25 could pull those numbers lower. First-quarter GDP growth was already moderating at 4.4%, down from 5.0% in Q4 2024.

The impact of the manufacturing slowdown will not remain confined to factories. As an open economy, Malaysia relies on external demand to support both investment and consumer spending. If exports shrink due to tariffs, households may cut discretionary spending, while firms delay hiring and capital expenditures. “The investment and household consumption cycles are exposed to fluctuations in exports,” Lavanya added.

The stakes are particularly high for Malaysia’s electrical and electronics (E&E) industry, which accounts for the lion’s share of US-bound exports. If Washington introduces sector-specific semiconductor tariffs, the drag could intensify, especially for integrated circuit producers and component manufacturers operating out of Penang and Johor.

The options for fiscal and monetary policy intervention are limited. Bank Muamalat Malaysia’s chief economist, Mohd Afzanizam Abdul Rashid, acknowledged that a rate cut could ease borrowing costs, but emphasized that structural challenges persist. “More importantly is the rate of implementation of approved investments,” he noted, citing the 3,494 manufacturing projects approved between 2021 and 2024. While 87% are underway in some form, sentiment-sensitive stages like factory construction and capital imports may slow in a tariff-risk environment.

Afzanizam also flagged that the World Bank had revised its 2025 global growth outlook downward from 2.7% to 2.3%, citing rising trade barriers and policy uncertainty. Malaysia’s GDP forecast was similarly downgraded from 4.5% to 3.9%.

To counteract headwinds, economists advocate for targeted incentives and infrastructure upgrades. Proposals include tiered energy pricing for efficient manufacturers, expansion of logistics and industrial parks, and accelerated deployment of smart grids and 5G networks in high-tech corridors.

Despite the looming challenges, there are pockets of resilience. Domestic demand, including vehicle sales and tourist arrivals, remained solid in Q1. Moreover, the government continues to advance medium-term reforms aimed at raising value-added output and enhancing industrial diversification.

The Johor-Singapore Special Economic Zone (SEZ), announced earlier this year, is one such initiative. If successfully implemented, it could serve as a hedge against US-bound export risk by opening new regional logistics and investment pathways.

Centre for Market Education CEO Carmelo Ferlito noted that while a slowdown in external demand is to be expected, the IPI’s continued growth signals that real output has not yet entered contraction. He also called for regulatory reform to help manufacturers pivot. “It’s time to cut red tape and rationalize incentive schemes,” he said. “Commercial agreements with new partners should be fast-tracked, and both tariff and non-tariff barriers need to be reassessed.”

For now, Malaysia’s manufacturing outlook hinges on trade diplomacy. If the reciprocal tariffs are lifted or reduced, current growth levels may hold through 2H25. If not, the sector’s performance could decline toward the 3.8% forecast by OCBC—well below 2024’s 4.2%.

The coming months will test not only the sector’s resilience but the effectiveness of Malaysia’s policy apparatus in steering through a trade-driven macro shock. For a country whose growth narrative has long been tied to global integration, the cost of exclusion is no longer abstract—it’s quantifiable. And the countdown has begun.