April 10, 2025
PETALING JAYA – Economists are downgrading their growth forecasts for the RM1.93 trillion Malaysian economy as the tariff war turns nasty.
However, this could well be the beginning or the first round of forecast revisions, assuming global macroeconomic conditions continue to worsen.
If that happens, Bank Negara may be forced to cut interest rates to stimulate the economy, although governor Datuk Seri Abdul Rasheed Ghaffour reportedly said that monetary policy is “not the best tool” to resolve trade wars.
In the event “trade hits hard”, UOB Kay Hian Wealth Advisors Sdn Bhd head of investment research Mohd Sedek Jantan told StarBiz “fiscal stimulus may be back on the table”.
At this point, future corporate earnings and exports prospects already look unexciting as spooked businesses factor in massive supply chain disruptions ahead.
This also raises questions on Malaysia’s ability to break last year’s record-high approved investments of RM378.5bil.
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As a trade-reliant economy, where the trade-to-gross domestic product (GDP) ratio stood at 149.1% in 2024, there is nothing much that Malaysia can do to fully shelter itself from the adverse outcomes of the tariff war, which could drag the world into a recession.
Global brokerages have raised the odds of a global recession, with JP Morgan pointing towards a 60% chance.
Some countries have already started cutting interest rates in anticipation of a substantial slowdown ahead.
India and New Zealand, for example, have cut their interest rates as they prepare domestic economies for more turbulence ahead. The central bank of India has even signalled the possibility of more rate cuts going forward.
Ironically, the United States has slapped a 26% import tariff on Indian products, even though US president Donald Trump had previously called Indian prime minister Narendra Modi a “great friend”.
As for Malaysia, the tariff imposed was 24%. While it is higher than Singapore’s 10% and the Philippines’ 17%, it is lower than Cambodia (49%) and Vietnam (46%).
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However, the biggest tariff victim is China, which was slapped with a 104% tariff following which the world’s second-largest economy retaliated with a higher 84% tariff on American products with immediate effect.
With global trade set to be more expensive in the coming months amid supply chain disruptions, economists foresee the economy growing at a slower rate, albeit still above 4% for now.
CIMB Securities has slashed its 2025 GDP growth forecast to 4% from 5% initially. Maybank Investment Bank Research has cut its forecast to 4.3% as compared to 4.9% previously.
Meanwhile, OCBC Bank has marginally reduced its estimate by 0.2 percentage points to 4.3%.
For the moment, OCBC Bank said the relief for Malaysia’s exports is that semiconductor exports are still exempt from the reciprocal tariffs. This accounts for a third of total exports to the United States.
“Given the nature of the reciprocal tariff announcements, it seems like only a matter of time before semiconductor exports are slapped with tariffs. This will have a more significant impact on Malaysia’s GDP growth,” the bank stated.
Beyond just Malaysia, Socio-Economic Research Centre executive director Lee Heng Guie said the entire world economy is expected to slow down in 2025.
Speaking with StarBiz, he said one must not underestimate the impact of a full-blown trade war on the world economy and its negative spillover effects on Malaysia.
“Concerns about the scalable trade war have already caused ripple effects in the financial markets worldwide.
“Consumers and businesses will encounter higher inflation and increased business cost, resulting in lower demand and spending, lower output and business investment,” he said.
Lee pointed out that the US market contributed 13.2% of Malaysia’s exports in 2024. Combined with China and the European Union, the share rises further to 33.3%.
“Malaysia’s small open economy will inevitably be affected by the US tariffs and global trade tensions via the trade, income, financial and investment channels.”
There are rising concerns on whether the escalating tariff war may reverse Malaysia’s foreign direct investment trend of recent years or even stall some of the previously committed investments that are yet to be established in Malaysia.
In response to this, Lee said the tariff war may lead to a cautious investment approach with regard to capacity expansions.
“This will significantly impact private investment growth, as companies may hesitate to commit new projects due to the unpredictable trade environment, slowing both domestic and foreign investment.
“As demand for goods decreases and lower production, small and medium enterprises, which often rely on larger export-oriented firms for orders and sub-contracting jobs, could face significant disruptions, resulting in reduced production capacity, layoffs, or even closures.”
UOB’s Mohd Sedek said if businesses freeze, delay hiring or hold off investment, the downturn becomes self-fulfilling.
“The answer isn’t panic—but it sure isn’t denial either.”
The impact of the tariff war will gradually be seen starting from the ongoing second quarter of 2025 (2Q25), with greater effects to be seen in coming quarters.
He pointed out that nine out of ten economists have forecast slower GDP growth in 2Q25 compared to the first quarter.
He told StarBiz a 1% drop in world GDP could shave nearly 0.38% off Malaysia’s own growth.
The volatility in the ringgit will also likely rise.
“But some regional buffers exist—China is shifting more exports to Asean, and Asian central banks are getting ahead of the curve.”
On private investments, Mohd Sedek said the likelihood of a reversal in the investment trend hinges on the escalation of tariffs and the trajectory of global growth.
“Should US-China trade negotiations fail—or if the reliability of the US as a trade partner is further questioned—foreign direct investment inflows could fall by 10% from the RM170.4bil seen in 2024.
“This would represent a moderate 20% risk of reversal,” he cautioned.