Economists ‘cautiously optimistic’ on Malaysia’s economy in 2025

PETALING JAYA: After a robust performance this year, economists are relatively optimistic the Malaysian economy will achieve steady growth at around 5% in 2025.

Sunway University economics professor Yeah Kim Leng said factors for “cautious optimism” on the Malaysian economy in 2025 include resilient domestic demand backed by well-supported private consumption, and rising private investment.

He said gross domestic product (GDP) growth in 2024 is expected to hover at or slightly above 5% following a higher-than-expected 5.2% expansion in the first three quarters.

“It is forecast to expand at between 4.8% and 5.3% in 2025 with risks tilted downwards due to elevated global uncertainties and increased fragilities in the US, European and other advanced economies,” he told FMT.

He said continuing income and wage growth coupled with low unemployment and targeted income support by the government are expected to sustain private consumption, which has a dominant 61% share of GDP.

Private investment, which contributed 22% to GDP, is expected to expand less robustly but will still maintain high single-digit growth in 2025, he noted.

He said both private consumption and investment, which together account for more than 80% of GDP, will likely offset any sharp decline in external demand should the global economy cool sharply in 2025.

The mildly expansionary government budget for 2025 is also expected to provide some support with a likely increase in counter-cyclical spending in the event of an external demand shock, he added.

Bright spots

Yeah said potential bright spots for the economy include a continuing surge in inward foreign direct investment (FDI) particularly in data centres and other high-tech industries, start-up of the Johor-Singapore Special Economic Zone, and Sarawak’s energy-based industrial expansion.

“At the regional level, an acceleration in regional economic integration in Asia spurred by the various trade agreements as well as Malaysia’s chairmanship of Asean are among the longer-term growth boosters,” he added.

He said the continuing growth of the economy will strengthen support for the unity government, thereby affirming the country’s political stability over the next two to three years until the next general election.

“With the various development plans and blueprints in place, including the 13th Malaysia Plan (2026-2030) that will be launched in 2025, we will likely see a pick-up in the pace of reforms.”

The fiscal reforms implemented thus far have improved the resilience of the economy against external shocks and risks to growth anticipated in 2025, he added.

Strong economic performance

Meanwhile, the International Monetary Fund (IMF) said Malaysia’s economic performance has “significantly improved in 2024”, supported by strong domestic and external demand.

It said economic growth is projected to moderate from 5% in 2024 to 4.7% in 2025, reflecting a moderation in investment growth, including from rising global uncertainty.

“Malaysia’s strong economic performance provides the country with a window of opportunity to advance its ambitious reform agenda. The government’s structural reform plans under the Economy Madani Framework are appropriately focused,” the fund said in a recent statement.

The IMF also recommends continuing fiscal consolidation to rebuild the country’s fiscal buffers. “The authorities’ commitments to ongoing fiscal consolidation and retargeting of RON95 gasoline subsidies are welcome.”

It said the current neutral monetary policy stance is appropriate. “Bank Negara Malaysia (BNM) should stand ready to tighten monetary policy if the upside inflation risks materialise,” it said.

UOB Global Economics and Markets Research has tweaked its GDP growth projection for 2024 to 5.3% from 5.4%, while keeping its growth forecast for 2025 at 4.7%.

“Domestic catalysts include expansionary fiscal policy, favourable labour markets, implementation of national masterplans and high impact projects, as well as stable interest rates,” it wrote in a note.

“That said, downside risks to the growth outlook for 2025 have also risen given the looming threat of US tariff risks and impact on global trade,” it added.

HSBC expects Malaysia’s growth to accelerate to 5% in 2024 but sees slight upside risks to its growth forecast.

“For 2025, we are constructive about Malaysia’s growth outlook, despite some lingering uncertainty on global trade. We expect growth to remain strong at 4.6%,” HSBC said in a note.

Capital Economics, which forecasts Malaysia’s GDP at 5.5% in 2024, thinks a jump in inflation, driven by the removal of food and fuel subsidies, will weigh on private consumption growth in the coming year.

It is expecting Malaysia’s GDP growth to ease to 5% next year. “A key downside risk to the economic outlook is tighter monetary policy than we had previously expected,” it said, raising the possibility of BNM raising the interest rate next year.