Risks for the domestic economy are mainly external, especially Trump’s potential sweeping tariffs on China and other trading partners.
The Malaysian economy proved its resilience towards the end of 2024, putting itself in a good position as it marched into 2025.
Despite facing a confluence of headwinds, recent macro patterns and economic indicators for the domestic economy remain on the right track and there must be no let up in addressing structural issues and economic reforms.
Real gross domestic product (GDP) saw better-than-expected growth of 5.3% year-on-year (y-o-y) in the third quarter 2024 (3Q24) and 5.2% in the first three quarters, closing 2024 with a full-year growth of 5.3%, by our estimates.
This is at the upper bounds of the Finance Ministry’s estimated range of between 4.8% and 5.3%.
The good GDP performance was driven by strong public and private investment, improved exports, and increased household spending amid cost of living increases. The services, manufacturing and construction sectors were the leading drivers.
Of significance is the spectacular performance of private investment, which surpassed expectations to grow robustly by 12.2% in the first three quarters of 2024, driven by increased spending on infrastructure, machinery and equipment.
Going forward, approved catalytic projects in the manufacturing and services sectors, including telcos and data centres will continue to sustain strong private-investment activity.
High frequency data year-to-date still suggest Malaysia’s positive economic outlook ahead.
The leading index continued to increase, albeit moderately in October 2024, for 11 consecutive months; wholesale and retail trade increased 5.5% in October versus 3.8% in September; industrial output grew; exports turned around to increase by 4.7% y-o-y in January-November 2024 after a decline of 8% in 2023.
Continuing growth
Heading into 2025, we expect the Malaysian economy’s expansion to remain on course, albeit with challenges, underpinned by supportive expansionary fiscal policy and still accommodative interest rates.
We estimate real GDP to grow by 5% this year, lower than the estimated 5.3% for 2024.
However, it is higher than the long-term average economic growth of 4.3% per year from 2011 to 2023. Domestic demand will still call the shots, aided by continued external demand.
Our assessment of Malaysia’s economy this year takes a probabilistic approach with assumptions about global growth, domestic drivers and policies, and risks to the outlook.
The year is shaping up to be one of volatility, uncertainty, complexity and ambiguity.
Policy uncertainty takes centre stage as President-elect Donald Trump’s trade protectionism, economic and investment agenda could stir disruptions and influence global trade, economic growth, redirection of investment, financial flows and exchange rates.
Additionally, persistent ongoing conflicts in Ukraine and the Middle East remain a big risk if tensions escalate.
The bigger picture for the global economy is expected to show moderate growth estimated at 2.9% for 2025 compared with the estimated 3.2% for 2024.
This is expected to be driven by positive labour market conditions, resilient consumer spending, easing inflation and lower interest rates.
Nevertheless, any major shocks and policy missteps could hamper global growth.
We estimate Malaysia’s exports to grow by 4% in 2025 compared with the estimated 5.1% for 2024.
We remain wary about trade diversion due to the Trump’s planned blanket tariffs on imports to the United States from China and other trade partners, including Malaysia.
For January to October 2024, Malaysia was the United States’ 18th largest trading partner and 16th largest source of imports.
In 2020, 15.1% of Malaysia’s total domestic value-added exports was ultimately consumed in the United States.
Higher import tariffs will dampen the production volumes of Malaysia’s exports bound for the United States.
That said, some manufacturers may not be affected given strong demand.
There could be some positive offsetting of trade, with China companies and foreign MNCs diverting production to Malaysia for manufacturers seeking to reconfigure sourcing and supply chains under the China+1 and Taiwan+1 strategies.
During Trump’s first term, tariffs on China in 2018 and 2019 saw US imports from Malaysia growing by 7.7% a year.
However, the biggest driver of Malaysia’s economy’s strength has been consumer spending (64.4% of aggregate domestic demand for January to September 2024), which contributed an average of 3.2% points of real GDP growth in the first three quarters of 2024.
Consumers have been more cautious but continue to spend.
We estimate consumer spending to grow by 5.4% in 2025 against the estimated 5.3% for 2024. This will be supported by the stable unemployment rate estimated at 3.1%, improved nominal wages and income growth.
Positive factors underpinning consumption are the higher minimum wage, pay rises the public sector, continued cash assistance of RM13bil for some nine million recipients, and withdrawals from the Employees Provident Fund’s Flexible Account.
Foreign investments
We expect a multi-year private investment growth cycle ahead, estimated at 11.5% for 2025, against the estimated 12.5% in 2024, with catalytic support from the government’s continued implementation of the New Industrial Master Plan 2030, National Energy Transition Roadmap, National Semiconductor Strategy and Johor-Singapore Special Economic Zone.
The International Monetary Fund and rating agencies have hailed Malaysia’s economic performance based on the implementation of economic reforms, as well as the government’s commitment to enhancing a conducive investment climate.
Given its strategic location, Malaysia is gaining increasing importance as a destination for supply-chain relocation for global manufacturing and services.
Total approved domestic and foreign investments increased by 10.7% to RM254.7bil in the first nine months of 2024. This was another strong showing compared with RM329.5bil in 2023, RM267.7bil in 2022.
Among the potential sectors are high-growth high-value industries such as semiconductors, machinery, chemicals and pharmaceuticals, medical devices, aerospace, electric vehicles, renewable energy, and the digital economy.
Malaysia is aiming to become a data centre hub in the region, with a slew of investments in such facilities being announced in recent months.
Approved investments from data centres amounted to RM114.7bil from 2021 to 2023.
We caution that there are upside risks to the inflation outlook in 2025, which will continue to impact the cost of living, shaping consumer confidence and spending in the months to come.
This is due to the government’s plans to rationalise fuel subsidies, expand the scope of the sales and service tax, and higher wages leading to higher than expected inflation.
Input-cost inflation will remain a key headwind in 2025 as businesses seek to offset some of the increased operating costs.
We estimate inflation to increase between 2.5% and 3% in 2025 versus the estimated 1.9% in 2024.
After suffering depreciation of 13.1% against the US dollar from 2021 to 2023, the ringgit closed 2024 with a 2.8% rise against the US dollar to close at RM4.4720 in December compared with RM4.5900 in 2023.
The ringgit’s fundamental value will be underpinned by strengthened economic resilience, favourable economic growth and investment prospects.
More importantly, there must be no let up in structural reform as it is the key to ensure enduring support for an “undervalued” ringgit.
Near-term headwinds to the ringgit are the policy uncertainty around Trump’s economic and investment agenda and concern about possible tariff-induced trade wars.
US tax cuts and investment incentives may reignite inflation, compelling the US Federal Reserve to reset its monetary easing and as a result reinforcing the US dollar’s strength.
The ringgit is expected to settle at lower levels between RM4.50 and RM4.60 against the US dollar in the first half of 2025 before gradually improving to about RM4.30 to RM4.40 by end-December 2025.
We expect Bank Negara to tread cautiously on interest rates in 2025 as it assesses the downside risks to growth and upside risks to inflation.
The central bank is expected to keep its policy rate unchanged at 3% in 2025 while keeping vigilant for cost-driven inflationary pressures coming from the anticipated fuel subsidy rationalisation and wage increases.
Risks for the domestic economy are mainly external, especially Trump’s potential sweeping tariffs on China and other trading partners.
The risks also include the unpredictable disruption of supply chains, weaker-than-expected global growth, weakening of the economy in the United States as well as China, lower commodity prices, and escalation of geopolitical conflicts.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
