Malaysia GDP growth slows in Q1

[MALAYSIA] Malaysia's economy expanded by 4.4% year-on-year in the first quarter of 2025, according to the Department of Statistics Malaysia (DOSM). This marks a slowdown from the 5.0% growth recorded in the previous quarter, falling slightly below economists' forecasts of 4.5%.

Domestic Demand Supports Growth

The services sector remained the primary driver of economic activity, growing by 5.2% year-on-year. The manufacturing sector also showed resilience, expanding by 4.2%, bolstered by strong output in electrical, electronic, and optical products, as well as vegetable and animal oils and fats.

The robust performance in the services sector reflects growing domestic consumption, which has been buoyed by a stable labor market and rising disposable incomes. Sectors such as retail trade, transportation, and real estate have been the primary contributors to this growth. Consumer confidence remains relatively high, with a strong recovery in tourism bolstering the overall demand.

Construction activity continued its robust performance, with a 14.5% increase, marking the fifth consecutive quarter of double-digit growth. This was primarily driven by specialized construction activities and residential buildings.

External Challenges Weigh on Growth

Despite domestic strength, external factors posed challenges. The mining and quarrying sector contracted by 4.9%, reflecting lower production across all sub-sectors. Additionally, global trade tensions, particularly between the United States and China, have created uncertainties that may impact Malaysia's export-driven sectors.

Rising global inflationary pressures have also contributed to the economic strain. The continued volatility in energy prices and higher raw material costs have placed additional pressure on Malaysia's manufacturing and construction sectors. Moreover, the global semiconductor shortage has affected Malaysia’s high-tech industry, which is heavily reliant on semiconductor production and assembly.

Outlook for 2025

Bank Negara Malaysia (BNM) has indicated that the current global trade environment may lead to a downward revision of the country's 2025 GDP growth forecast, which is currently set between 4.5% and 5.5%. The central bank is monitoring developments closely and plans to update its projections in the coming months.

Economists have also adjusted their forecasts in response to the evolving global landscape. CGS International Securities Malaysia revised its 2025 GDP growth forecast to 4.2%, citing weaker-than-expected performance in the first quarter and ongoing trade uncertainties. Similarly, the International Monetary Fund (IMF) has downgraded Malaysia's growth outlook to 4.1%.

Policy Responses

In light of the economic challenges, BNM has taken steps to support growth. The central bank recently lowered the statutory reserve requirement by 100 basis points to 1.00%, injecting approximately 19 billion ringgit (US$4.4 billion) into the banking system to stimulate lending and economic activity.

To support the domestic economy, the Malaysian government is focusing on infrastructure development, with several key projects aimed at improving transport and digital connectivity. These projects are expected to foster long-term growth, particularly in the digital economy and green energy sectors. Additionally, measures to attract foreign direct investment are being ramped up, with a particular focus on the electronics and clean energy industries.

The Malaysian government is also engaged in trade negotiations with the United States to address tariff concerns. Trade Minister Tengku Zafrul Aziz expressed optimism about reaching a deal to reduce tariffs, following discussions with U.S. Trade Representative Jamieson Greer during a recent Asia-Pacific Economic Cooperation (APEC) summit.

While Malaysia's economy demonstrated resilience in the first quarter, external challenges, particularly global trade tensions, pose risks to the growth outlook. Policymakers are closely monitoring developments and are prepared to implement measures to support the economy in the face of these uncertainties.