Malaysia’s Economic Momentum Likely Wanes In 1Q Amid China Concerns, Tariff Overhang

By Rosemarie Khoo and Engku Shariful Azni Engku Ab Latif

KUALA LUMPUR, May 14 (Bernama) -- Malaysia’s first quarter (1Q) 2025 gross domestic product (GDP) figures are set to challenge market expectations as investors attempt to untangle a complex mix of past trade distortions and growing concerns over the country’s economic exposure to China.

According to advance estimates, GDP growth moderated to 4.4 per cent year-on-year (y-o-y) in 1Q 2025, down from 5.0 per cent in the final quarter of 2024. 

The slowdown occurred despite a temporary boost from firms frontloading exports ahead of anticipated tariff increases - suggesting that the economy was already losing momentum even before the trade turbulence peaked.

“The economy didn’t need another headwind - it was already wobbling,” SPI Asset Management managing partner Stephen Innes told Bernama. 

He said the outlook is further complicated by the broader geopolitical backdrop. 

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A recent rollback in US tariffs on Chinese goods may reduce headline trade risk, but analysts warn the damage to sentiment and business activity began long before any easing of tensions.

Factory output remained in contraction throughout the quarter, reflecting waning industrial activity. 

More concerning, investment activity also showed signs of stress. 

Fixed investment loan applications dropped 3.1 per cent y-o-y - the first decline since late 2022, while disbursements fell 7.6 per cent, marking the third consecutive quarterly drop.

Market participants are now weighing how much of the slowdown can be attributed to tariff-related distortions, and whether any short-term weakness might be overlooked in favour of longer-term recovery potential. However, structural risks loom larger. 

“The real issue isn’t just trade mechanics - it’s China. Malaysia’s deep trade linkages with a deflation-prone Chinese economy are proving to be the more persistent drag,” he said. 

With China still struggling to reignite demand and stabilise prices, the knock-on effects are being felt across the region, and Malaysia is particularly exposed.

In this environment, Malaysia’s official growth target of 4.5 to 5.5 per cent for 2025 is beginning to look overly optimistic. 

Policymakers are reportedly considering a downward revision, and Bank Negara Malaysia (BNM) has shifted its policy tone from neutral to cautiously dovish.

The central bank has acknowledged external headwinds from trade tensions and flagged the risk of spillover from slowing growth in key trading partners. 

Fortunately, benign inflation gives BNM policy space to act.

“With inflation subdued and the growth outlook deteriorating, the stars are aligning for a rate cut. A 25-basis-point reduction as early as July is now firmly on the table, especially if the 1Q numbers disappoint further or global demand continues to soften," Innes said. 

Ultimately, the 1Q 2025 GDP release is more than a snapshot of recent economic activity, it’s a test of investor confidence in Malaysia’s ability to weather a more hostile external environment.

“As much as markets may want to look past near-term softness, the reality is that China remains stuck in neutral and domestic investment is sagging.

“The message is clear: Malaysia may be experiencing strains on its resilience, and interest rate cuts are no longer just a possibility - they’re becoming a probability," he added. 

Meanwhile, Sunway University economics professor Dr Yeah Kim Leng said the country's 1Q GDP is expected to be higher than the advance estimate of 4.4 per cent released by the Department of Statistics Malaysia (DoSM). 

This is given the better-than-expected growth of manufacturing Industrial Production Index (IPI) and wholesale and retail trade in the month of March reflective of Malaysia's external and domestic performance respectively. 

He added that other supporting factors of sustained GDP growth are continuing lending and borrowing activities and low inflation that are both supportive of domestic consumption and investment.

-- BERNAMA