Strong Growth in Q2 Masks Underlying Weakness
Despite a better-than-expected GDP performance in the second quarter of 2025, economists are maintaining a cautious stance on Malaysia’s economic outlook for the remainder of the year. Advance estimates from the Department of Statistics Malaysia showed GDP expanding by 4.5% year-on-year, a slight increase from the 4.4% growth in the previous quarter and surpassing the Bloomberg median forecast of 4.2%. While this robust growth was driven by resilient domestic demand, particularly within the services sector, experts warn that the momentum is likely to slow in the second half of the year. This anticipated slowdown is primarily attributed to weakening external demand, a deceleration in manufacturing activity, and the delayed impact of various domestic fiscal reforms. According to OCBC Global Markets Research, the data presents a mixed picture, where a strong headline number conceals a more concerning underlying weakness in key sectors like manufacturing and exports.
Trade Headwinds and Domestic Policy Reforms
Multiple research firms have pointed to specific factors that will contribute to the anticipated slowdown. OCBC highlighted the fading impact of “frontloading” activities, a period from late 2024 to early 2025 where exports, particularly in the electrical and electronics (E&E) sector, were accelerated to the US ahead of potential tariff changes. This effect is now subsiding, with E&E export growth decelerating sharply in June. HSBC Global Research, while noting a continued “investment boom” in sectors like construction, cautioned that a combination of factors, including ongoing US trade negotiations and the lagged effects of Malaysia’s expanded sales and service tax (SST), will weigh on growth. UOB Global Economics and Markets Research echoed these concerns, also flagging that recent US tariff decisions could reduce Malaysia’s export competitiveness compared to regional rivals and that domestic businesses face rising cost pressures from the wider SST and other policy changes.
Divergent Views on Monetary Policy and Future Drivers
The uncertainty surrounding the economic outlook has led to a split among economists on the future of monetary policy. Following a recent 25-basis-point interest rate cut by Bank Negara Malaysia (BNM) to 2.75%, analysts from UOB and OCBC believe another rate cut is possible in the second half of the year if growth risks intensify. Conversely, other experts at ANZ and Nomura do not foresee further monetary easing, arguing that BNM typically reserves such back-to-back cuts for major economic shocks and views the current growth outlook as relatively optimistic. Despite the headwinds, some research houses remain more bullish. Nomura, for example, holds a higher full-year GDP forecast of 4.4% and believes that ongoing public and private investments in infrastructure, the digital economy, and projects like the Johor-Singapore Special Economic Zone (JS-SEZ) will provide crucial support and help buffer against global trade challenges.
