Economic Focus: Weathering stormy waters

• Slower global economic growth looms large amid heightening external uncertainties
• Strong underlying fundamentals cement position of strength to help navigate trade protectionism
• Cautiously optimistic of 2025 growth prospects and expect 4.3% GDP growth

Rising consternation amid unchartered waters

Challenging global environment due to US trade protectionism and escalating geopolitical conflicts has posed serious threats to global economic growth trajectory which has been exacerbated by volatile financial conditions. Meanwhile, global trade is expected to moderate in 2H25 as on-going trade tensions unfold amid ever-shifting US tariff policies, driven by US' increasingly untenable fiscal position. Unsurprisingly, global consumer confidence has deteriorated given the confluence of negative news flow that suggest weaker purchasing power ahead. Therefore, intersifying downside risks have prompted both the IMF and World Bank to cut 2025 gloal growth by 0.5bps and 0.4bps respectively. Subdued global growth is unlikely to improve significantly in the near term given the ensuing trade uncertainties.

Resilient domestic demand

Notwithstanding external headwinds, Malaysia's economy remains firmly on a heallthy growth trajectory as domestic demand is likely to strengthen further with sustained consumer spending and strong investment activities. Its strong fundamentals and diversified economic structure, coupled with government's concerted effort to spur higher economic growth will help ensure Malaysia's uptrend stays intact. Despite concerns of slower growth, Apr 2025 credit demand has demonstrated healthy y-o-y growth as loans for households and businesses grew by 5.9% and 4.0%, respectively. Steady overall banking system loans growth of 5.1% in Apr 2025 (vs 5.5% in Dec 2024) signifies the positive growth trajectory of Malaysia's economic outlook in 2025.

Committed to reforms to bolser fiscal space for sustainable growth

The Madani admistration has prioritized the people's well-being while implementing targeted reforms to uplift Malaysia's economy. After the implementation of diesel subsidy rationalization and the increase of sales & service tax (SST) rate to 8% from 6% in 2024, Malaysia is set to further reform its costly petrol subsidy and expand the coverage of SST in 2H25 to rectify the structural issue of low tax-to-GDP. E-invoicing has also been rolled out in phases for effective tax collection and compliance. More importantly, 2025 budget deficit is on track to fall to the lowest since 2019 at 3.8% (vs 4.3% in 2024) as 1Q25 fiscal deficit shrank 17% y-o-y. While short-term pains from implementing reforms is always challenging, Malaysia's robust labour market with the unemployment rate at a 10-year low of 3% will remain supportive of domestic demand.

Well-positioned to navigate trade protectionism

Malaysia's diversified export composition and non-aligned policy that prioritises economic cooperation and integration will stand it in good stead. We are cautiously optimistic of Malaysia's economic outlook, and project 2025 GDP growth to come in at a relatively healthy pace of 4.3%. Fundamentals remain strong as Malaysia's economy continues to take comfort from its resilient domestic demand, underpinned by sustained household spending. Key downside risks include slower-than-expected recovery in external demand and spillovers from heightened geopolitical tensions. 

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