‘Malaysia economy likely to slowdown in second half of 2025’
Malaysia is likely to experience a slowdown in the second half of this year (2H2025), but the economy is robust enough
KUALA LUMPUR, Malaysia (MNTV) – With the US reciprocal tariffs having taken effect from Aug 7, Malaysia is likely to experience a slowdown in the second half of this year (2H2025), but the economy is robust enough to get through it, reports The Edge Malaysia.
“The economy is going to slow from 1H, at least in our baseline,” says Oversea-Chinese Banking Corporation (OCBC) Asean economist Lavanya Venkateswaran in an interview. “But Malaysia’s economy is not by any means going into a recession … the distinction is that for an externally driven economy, Malaysia’s economy remains resilient, even when one of its largest trading partners has increased tariffs at a very punitive level, as its internal engines of growth are functioning well.”
OCBC estimates the country’s 2H2025 gross domestic product growth to slow down sharply at 3.5% year on year (y-o-y), from 4.4% in 1H2025. The house’s full-year estimate is 3.9%, below the lower bound range of the revised official projection of 4% to 4.8%.
While domestic demand is expected to continue to anchor growth, Lavanya opines that the tariffs will have a knock-on effect on areas such as investment spending and even possibly household consumption, resulting in slower growth momentum.
Compared with the tariffs that were imposed a year ago, 19% is exorbitant, says the economist, noting it will impact exports to the US.
The only relief for the country is that semiconductor exports are still exempt from tariffs at this juncture, but this might not last for long as the Trump administration has indicated before that it is also looking to impose tariffs on the industry.
Electrical & electronic (E&E) products constitute a significant portion of Malaysia’s exports to the US. In 2024, E&E products to the US amounted to 120 billion Malaysian ringgit ($28.37 billion), representing about 60% of the total exports to the US of 198 billion Malaysian ringgit ($46.79 billion).
With about half of the exports to the US excluded from tariffs, Lavanya believes that the shock to growth from the 19% tariff has not been fully priced in just yet.
The extent to which the currently exempted semiconductor sector will be affected by potential tariffs is uncertain for now.
“Once those [tariffs on semiconductors] are confirmed, I think there will be some downside to growth. There will be a case for us to review the forecast [on exports] that we have because it is fairly material,” says Lavanya.
She adds that the bank’s full-year growth estimate, which is below the official revised growth forecast, “has a lot to do with the fact that front-loading of exports to the US has already started coming off.”
This year, exports to the US peaked in March, hitting 22.66 billion Malaysian ringgit ($5.36 billion), 50.8% higher than a year ago. Since then, the year-on-year growth for exports to the US has declined, falling to single-digit levels in June and July.
Lavanya points out that one of the reasons for Malaysia’s slower export growth to the US, compared with other Southeast Asian countries, could be the tighter restrictions on exports to the US since the Ministry of Investment, Trade and Industry became the sole issuer of the certificate of origin as a way to prevent transshipment through Malaysia. This was implemented in May.
“The export slowdown will only be exacerbated as we go into the second half because once tariffs hit, the overall external demand is also going to slow. That means that demand from most other economies will also weaken,” she says.
Nevertheless, Lavanya believes that Malaysia is in a good position to weather the uncertain external environment, although a 2H slowdown is likely on account of the country’s reform trajectory.
Lavanya believes Malaysia is working hard to increase domestic demand growth and to improve the quality of domestic demand by focusing on raising investment spending while boosting growth that is not funded by debt.
“There are a lot of plans, such as the National Industrial Master Plan 2030, the Energy Transition Roadmap and the 13th Malaysia Plan. The good thing is that we are seeing some execution from these plans. I think a lot of these priorities are coming together now, and hopefully it will show results in a couple of years’ time.”
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