Malaysia growth misses forecasts even before US tariff hit

Malaysia’s economy expanded at a slower than expected pace in the first quarter, dragged down by weaker growth in manufacturing and construction even before the US announced plans for punishing tariffs.

Gross domestic product rose 4.4 per cent in the January-March period from a year earlier, according to advance estimates from Malaysia’s Department of Statistics on April 18.

That is below the 4.8 per cent median forecast in a Bloomberg News survey, and marks a third straight quarter of slower growth.

The mining and quarrying sector shrank 4.9 per cent as production fell.

The disappointing data comes as policymakers review the official 4.5 per cent to 5.5 per cent growth projection for 2025 on uncertainty over global trade.

Malaysia was hit with a 24 per cent US import tariff before US President Donald Trump temporarily pared it back to 10 per cent for 90 days while hiking tariffs on China.

“The downside risk to economic growth has become elevated, especially in the context of the US reciprocal tariff,” said Dr Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia.

“The uncertainties over tariffs would result in weaker business and consumer sentiments, which then can have an impact on actual spending.”

There is room for Malaysia’s central bank to ease policy and a 25-basis-point cut in the key rate in the second half of 2025 would help the economy, Dr Afzanizam said.

Officials have kept the benchmark at 3 per cent since May 2023, when they hiked by a quarter point.

The benchmark stock index in Kuala Lumpur extended its gain to 0.7 per cent at midday, while the ringgit remained little changed.

The services industry remained the main driver of growth in the first quarter, expanding by 5.2 per cent, according to a statement from the agency, which described the economy’s overall performance in positive terms.

“Malaysia’s GDP growth held firm amid persistent global headwinds, underpinned by resilient domestic fundamentals,” chief statistician Mohd Uzir Mahidin said in a statement. 

Still, the pace of services growth was also slower than in the previous quarter, and analysts are increasingly betting that Bank Negara Malaysia may cut rates to stimulate growth, even as the central bank has said it would look beyond monetary policy to deal with the tariff fallout.

Among South-east Asian neighbours, the Philippines lowered rates by 25 basis points and Singapore, which uses the exchange rate as its main policy tool, eased its monetary policy settings in April. Both central banks noted uncertainties over world trade. 

Malaysia remains one of the region’s fastest-growing economies, with expansions of 5.4 per cent and 5 per cent year on year in the third and fourth quarter of 2024, respectively, from a peak of 5.9 per cent in the April-June period.

That brought 2024 GDP growth to 5.1 per cent, within the government’s official forecast and above 2023’s performance, when tepid global demand hurt exports and manufacturing activity.

“Seasonal events such as Chinese New Year celebrations, preparations for Ramadan and the reopening of the school year helped keep overall economic activities on a positive track,” the statistics agency said. “Additionally, the labour market remained favourable, marked by a continued rise in employment and a stable unemployment rate of 3.1 per cent.”

But Mr Trump’s trade policies have clouded the outlook.

Malaysia is working to engage with the US to reduce tariff rates and expand the list of exemptions for its exports to mitigate the blow on the economy, Investment, Trade and Industry Minister Tengku Zafrul Aziz said on April 14. Like its regional peers, the country has pledged not to retaliate. BLOOMBERG