The possibility of a policy shift in subsidies later this year could raise headline inflation, pressure real incomes
by RUPINDER SINGH
THE country’s post-pandemic economic recovery is showing signs of fatigue, with United Overseas Bank Ltd’s (UOB) Global Economics & Markets Research warning that the country’s growth outlook has “clearly tilted lower” as headwinds from global trade tensions, moderating domestic demand and weakening investment momentum begin to bite.
In its latest macro note, UOB projects full-year GDP growth of 4% in 2025 — a relatively modest pace compared to the 5.9% peak seen in mid-2024 — with risks to the downside.
“Given that the US reciprocal tariffs will stay at 10% for 90 days until July 9, front-load- ing activity coupled with slower imports could provide some buffer for net trade,” the research house noted, while cautioning that “effects of the tariffs and trade uncertainty take a grip on the economy.”
Real GDP grew 4.4% year-on-year (YoY) in the first quarter of 2025 (1Q25) — the slowest pace in a year and a continued deceleration from the 4.9% recorded in 4Q24.
While still above the eight-quarter rolling average of 4.3%, UOB’s economists believe the softening trend is hard to ignore.
“Most key sectors recorded softer expansions while lower oil and gas (O&G) production remains a drag,” it said.
Private consumption, long a bedrock of growth, expanded by 5% — slightly down from 5.3% in the previous quarter.
Support came largely from spending on transport, food and hospitality, aided by a stable labour market and stronger tourism flows in early 2025.
Still, it noted that this consumer resilience may not last indefinitely, especially with inflation risks looming.
“Concerns over the upside risk to inflation from the retargeted fuel subsidy scheme has been overshadowed by external headwinds and downside risks to growth,” UOB added.
However, the possibility of a policy shift in subsidies later this year could raise headline inflation and pressure real incomes.
Investment activity is also showing signs of wear.
Private investment growth slowed to 9.2% in 1Q25 from 12.7% in 4Q24, as business sentiment moderated.
Public investment, on the other hand, rose 11.6%, driven by higher government and government-linked company (GLC) capital outlays.
But construction activity, while still growing at a double-digit pace of 14.2%, saw a sharp pullback from the 20.7% surge in the previous quarter — a sign that even infrastructure momentum is cooling.
Exports, long a mainstay of Malaysia’s open economy, grew just 4.1% in 1Q25, down sharply from 8.7% in 4Q24.
Meanwhile, net trade contribution fell to 0.8 percentage points (pps) from 2pps previously.
UOB pointed to slowing demand from key partners and continued inventory adjustment cycles, particularly in the electrical and electronics (E&E) segment.
What’s more worrying is what lies ahead.
According to UOB, pending US sector-specific tariffs particularly involving semiconductors, pharmaceuticals, lumber and critical minerals…will likely bring about a significant adverse impact on Malaysia’s trade outlook.
These measures, if enacted after the US-China trade truce ends in August, could hit Malaysia’s export-dependent sectors just as they are beginning to stabilise.
“Declining imports of intermediate and capital goods are another precursor to slower investments and trade. While we are not calling a recession, the growth path ahead is looking increasingly fragile,” UOB said.
Indeed, capital flows have turned skittish.
Portfolio investment outflows surged to RM48.3 billion in 1Q25 — the highest since the 2008 global financial crisis — reflecting growing investor caution.
Foreign-direct investment (FDI) also dipped slightly to RM15.6 billion, with flows still concentrated in services and communications, but showing signs of moderation.
In response, Bank Negara Malaysia (BNM) has begun loosening its monetary policy.
A surprise 100 basis points (bps) cut in the Statutory Reserve Requirement (SRR) on May 16 is expected to inject RM19 billion into the system.
UOB forecasts two additional cuts to the Overnight Policy Rate (OPR) — 25bps each in 3Q and 4Q — which would bring the benchmark rate to 2.5% by year-end.
“With three more scheduled BNM meetings this year, including one on July 9 coinciding with the end of the US tariff reprieve, the timing of these cuts is likely to be data dependent,” UOB said.
The central bank is expected to balance between growth support and emerging inflation pressures from fuel subsidy reforms.
Despite the cloudier outlook, there are still areas of support.
Tourism arrivals have picked up in early 2025, boosting services and hospitality sectors.
The government’s continued roll-out of fiscal measures — such as targetted subsidies, financing guarantees for small and medium enterprises (SMEs) and fast-tracked project approvals — offers some cushion.
UOB noted these “provide underlying support for growth,” though their effect may wane if global risks intensify.
Longer term, structural reforms remain key to restoring fiscal space and attracting investment.
“Efforts to widen the tax base, reduce blanket subsidies and strengthen fiscal discipline are necessary to ensure macroeconomic resilience,” the report noted.
In the near term, however, Malaysia’s economic path looks less certain than it did just months ago.
As global trade trembles under the weight of protectionist shifts and domestic engines lose steam, policymakers face the unenviable task of maintaining growth without igniting inflation or undermining confidence.
UOB’s final assessment underscores that caution: “The economy is well-positioned to weather ongoing challenges — but not immune.”
- This article first appeared in The Malaysian Reserve weekly print edition
The post Malaysia faces cooling momentum as growth outlook dims appeared first on The Malaysian Reserve.
