Malaysia’s 2025 growth forecast lowered amid rising trade tensions

[MALAYSIA] RHB Investment Bank Bhd (RHB IB) has reduced Malaysia's GDP forecast for 2025 downward to 4.5 percent from an earlier projection of 5.0 percent, citing escalating trade tensions and recent tariff hikes that threaten the country's export-driven economy.

The downward revision aligns with broader concerns among regional economists, who warn that Southeast Asia’s trade-reliant economies could face a collective slowdown if global protectionist measures intensify. Analysts from ASEAN+3 Macroeconomic Research Office (AMRO) have similarly flagged potential spillover effects, particularly for manufacturing hubs like Malaysia and Vietnam, which are deeply integrated into global supply chains.

The change is in response to the United States' broad tariff measures, which include a 24 percent levy on Malaysian exports. According to RHB IB's research note today, this scenario, which was previously believed unlikely due to the relatively minor US trade imbalance with Malaysia, has dramatically elevated downside risks. It stated that the balance of risks currently points to a 4.0 percent growth rate if tariff and trade tensions rise further.

The bank’s analysis also highlights Malaysia’s vulnerability to secondary effects from China’s economic slowdown, given that China is Malaysia’s largest trading partner. A contraction in Chinese demand for Malaysian electronics and commodities—such as palm oil and liquefied natural gas—could exacerbate the drag from US tariffs, further straining the country’s trade balance.

Our revision takes into consideration the impact of recent reciprocal tariffs on Malaysia, which results in a 0.4% GDP decline, compounded by greater US tariffs on China, which results in an additional 0.7% GDP decline (assuming no easing policies from China).

"We anticipate heightened headwinds for the economy, particularly within the trade and manufacturing sectors, beginning in the second quarter (2Q) of 2025, as the negative repercussions of these tensions become more pronounced," the company said.

Regarding the upcoming 1Q 2025 GDP advance announcement, the investment bank stated that Malaysia's economic growth is likely to range between 4.8 percent year on year (y-o-y) and 5.0 percent y-o-y, owing to the durable economic momentum seen thus far.

However, RHB IB cautioned that domestic consumption—a key growth driver in recent quarters—may lose steam if inflationary pressures resurge due to higher import costs from tariffs. Household spending, which accounts for nearly 60% of GDP, could weaken if real income growth stagnates or unemployment rises in export-oriented industries.

RHB IB stated that, while Malaysia's direct trade with the US accounts for only approximately 10% of overall trade volume and 11.6% of total exports, the effects are exacerbated by indirect pressures via global supply chains and a downturn in key economies such as China and the United States.

"In 2024, Malaysia's goods surplus with the United States was RM72.38 billion. Based on a modest price elasticity of demand of -0.5, the new US tax might lower Malaysian exports to the US by approximately 12%, resulting in an RM8.7 billion shortfall," it stated.

To cushion the shock, RHB IB anticipates Bank Negara Malaysia to consider lowering the overnight policy rate by 25 basis points in the second half of 2025, especially if growth falls below the official goal range of 4.5 to 5.5 percent.

"The central bank's monetary policy stance will hinge on three factors: the strength of economic momentum, inflation trajectory, and, to a lesser extent, global interest rate trends," it noted.

Market observers suggest that fiscal stimulus measures, such as targeted subsidies and incentives for affected exporters, could also be deployed to offset the tariff impact. The government’s upcoming 2025 budget, slated for October, is expected to provide clarity on these contingency plans, with particular focus on safeguarding small and medium enterprises (SMEs) reliant on US and Chinese markets.

To mitigate the impact of these tariffs, the investment bank stated that Malaysia would consider diversifying its export markets by focusing on high-growth regions and leveraging existing free trade agreements (FTAs), such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership.

"In addition, Malaysia will also foster new partnerships within ASEAN and enhance Malaysia's supply chain resilience by accelerating the implementation of key industrial policies like the New Industrial Master Plan 2030 (NIMP 2030) and the National Energy Transition Roadmap (NETR)," according to the announcement.