[KUALA LUMPUR] Malaysia’s economy expanded by 4.4 per cent in the first quarter of 2025, matching official forecasts, but Bank Negara cautioned that escalating trade tensions and policy uncertainties will decelerate growth for the remainder of the year.
The final figure slightly missed economists’ forecast of 4.5 per cent in a recent Reuters survey, and marked a slowdown from the previous quarter’s 5 per cent growth.
Quarter on quarter, seasonally adjusted gross domestic product in the January to March period expanded 0.7 per cent, contrasting with the 0.2 per cent contraction in the October to December period.
Growth forecast under review
While acknowledging that trade talk uncertainties and their global impact hinder a clear growth assessment, the governor stated the new official forecast awaits greater clarity, likely within one to two months.
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This aligns with a recent report from Minister of Investment, Trade and Industry Tengku Zafrul Aziz, saying that the government is analysing the macroeconomic effects of US tariffs and projecting a downward adjustment of 50 to 100 basis points to this year’s economic growth forecast.
Given Malaysia’s high export dependence, tariff shocks pose a significant risk to its economic outlook. The International Monetary Fund on Apr 23 has already revised Malaysia’s 2025 GDP growth downwards to 4.1 per cent from January’s 4.7 per cent forecast.
Moody’s Ratings also flagged downside risks to its initial 5 per cent growth projection, highlighting concerns that higher government spending to mitigate US tariffs could hinder fiscal consolidation.
Moody’s senior vice-president Christian De Guzman noted that a sharp global economic downturn might lead to a postponement of the removal of the blanket subsidy for Ron95 petrol.
With US tariffs imposed on South-east Asian countries, Malaysia’s 24 per cent rate falls between the Philippines’ 17 per cent and Vietnam’s 46 per cent. Indonesia has to bear 32 per cent, and Thailand 36 per cent.
Despite a 90-day suspension and a universal 10 per cent baseline tariff now – including Malaysia – analysts cautioned about future uncertainty.
RHB Bank economist Chin Yee Sian cautioned against premature optimism, highlighting that risks may persist beyond the initial 90-day tariff postponement expiring on Jul 8. To date, tariff exemptions have been limited to China and the UK, with details for other regions remaining scarce.
For 2025, RHB has maintained Malaysia’s GDP forecast at 4.5 per cent, while OCBC anticipates a slowdown to 4.3 per cent.
OCBC senior Asean economist Lavanya Venkateswaran said the outcomes of tariff negotiations between Malaysian authorities and Washington will be crucial for the semiconductor and pharmaceutical sectors.
She noted that the prevailing uncertainties are likely to foster a cautious “wait-and-see” approach among businesses and encourage households to increase precautionary savings, consequently affecting domestic spending.
Potential rate cuts
Bank Negara’s Abdul Rasheed noted that the current balance of risks increasingly leans towards a weaker growth outlook, and the central bank retains policy space for action.
“We are in a position of strength, and we have the policy instrument and policy space to act, if we need to,” he said.
Bank Negara’s decision last Thursday to lower the statutory reserve requirement (SRR) by 100 basis points was viewed by analysts as a strategic move, potentially paving the way for future interest rate cuts.
A reduced SRR frees up more funds for banks to lend, which can stimulate economic growth by increasing the availability of credit, said Moody’s Analytics’ economist Sunny Nguyen in a report last week.
Abdul Rasheed said Bank Negara’s monetary policy committee remains vigilant over ongoing developments that will affect the domestic economic outlook assessment.
The central bank held its key interest rate steady at 3 per cent at a policy meeting on May 8, saying the current level remains consistent with the outlook for inflation and growth.
Lower net exports
Resilient household spending and steady expansion in investment activities continued to drive Malaysia’s economic growth in Q1, though export activities slowed down due to lower mining exports.
Mohd Uzir Mahidin, chief statistician at Department of Statistics Malaysia, said the lower mining shipments were partially offset by stronger electronic products exports.
Malaysia’s net exports grew by 19.6 per cent in the January to March period, compared to a 63.6 per cent expansion in the October to December period.
Imports growth, although more moderate, continued to be driven by strong demand for capital goods, reflecting continued investment and trade activities.
Mohd Uzir noted that growth on the supply side was propelled by services, boosted by government spending, while manufacturing was driven by strong electronic products output.
“However, the normalisation of motor vehicle sales and production after three strong years may have dampened growth in both sectors. Overall expansion was also limited by a contraction in mining due to lower oil and gas production,” he said.
Inflation and ringgit movement
Headline inflation remained contained in the first quarter, declining to 1.5 per cent, while core inflation rose to 1.9 per cent, due to lower utilities and mobile services inflation, which were partially offset by higher rental inflation, said Abdul Rasheed.
For the full year, Bank Negara expects headline inflation to average between 2 and 3.5 per cent.
The ringgit remained largely stable in the first quarter of 2025, with a slight 0.01 per cent gain in the nominal effective exchange rate against key trading partners.
A more significant movement was the ringgit’s 0.8 per cent appreciation against the US dollar in the first three months of 2025.
“This was primarily driven by a weakening US dollar, a consequence of growing uncertainty surrounding US trade policy and the resulting increased anticipation of a more subdued US economic expansion,” said Abdul Rasheed.
As at 1.30 pm on Friday, the ringgit was trading at 4.2694 against the greenback, up 4.5 per cent from 4.4715 on Jan 1.
Against the Singapore dollar, it was trading at 3.2977, down 0.7 per cent from 3.2742 at the start of the year.
