MALAYSIA'S economic growth is expected to decelerate this year, with the Gross Domestic Product (GDP) projected to expand by a modest 4.5 per cent, down from 5.3 per cent in the previous year. This slowdown occurs against a backdrop of global economic uncertainties, domestic policy shifts and evolving market dynamics.

These concerns persist against the sustainability of growth trajectory, albeit signs of recovery from COVID-19 which recorded a GDP growth of 4.8 per cent in the last quarter of 2024.

Considering these challenges, several sectors are expected to experience declining performances, thus further impacting the overall GDP growth. The mining sector is projected to contract by 1.0 per cent, primarily due to planned maintenance shutdowns in natural gas facilities and moderate demand from major importing countries.

Similarly, the agriculture sector is expected to face a downturn, with a 0.6 per cent decline, driven by ongoing challenges in the oil palm subsector. The automotive industry is also likely to see a slight contraction of about 1 per cent in total industry volume, following a record performance in 2024 as backlog orders diminish and inflation pressures continue to affect sales. Additionally, rising operating expenditure may lead to increased costs for consumers, potentially dampening spending in the consumer sector.

The recent Bank Negara Malaysia’s economic statement highlights that while the global economy is anticipated to benefit from positive labor market conditions and moderating inflation, Malaysia's growth outlook would remain cautious.

BNM expects resilient domestic expenditure to drive economic activity in 2025, supported by employment and wage growth alongside policy measures like the upward revision of the minimum wage and civil servant salaries. These initiatives are expected to bolster household spending and sustain investment activity, particularly from ongoing multi-year projects in both public and private sectors.

Economists, however, caution that while domestic resilience remains strong, external factors such as trade policies and geopolitical tensions could significantly influence Malaysia's economic performance in the coming year. The BNM acknowledges that downside risks include potential slowdowns in major trading partners and heightened trade restrictions, which could impact exports and overall economic stability.

Economists from HSBC and RHB Research anticipate that BNM will maintain the Overnight Policy Rate (OPR) at 3 per cent throughout this year but caution that external uncertainties, particularly relating to trade policies and geopolitical tensions, could significantly influence Malaysia's economic performance.

On the inflation front, BNM projects an average rate of between 2.0 per cent and 3.5 per cent this year, factoring in domestic policy measures outlined in Budget 2025. This includes targeted RON 95 fuel subsidies and an expanded Sales and Service Tax (SST). However, the

International Monetary Fund (IMF) has warned that risks to this outlook are titled to the upside, including potential global commodity price shocks and wage pressures.

As part of its fiscal consolidation efforts, the Malaysian Government is expected to implement significant subsidy cuts this year, particularly targeting the top 15 per cent of income earners. This move is anticipated to reduce the overall spending on subsidies and social assistance by
14.4 per cent, amounting to approximately RM52.6 billion.

The removal of blanket RON 95 petrol subsidies could lead to an increase in consumer prices, affecting household budgets and potentially dampening consumer spending. BNM has incorporated the potential rationalisation of RON 95 fuel subsidies into its inflation forecast for 2025, projecting a rate of between 2 per cent and 3.5 per cent.

Reduction in subsidies could create additional pressures on low- and middle-income households and impact their overall economic activities, contributing to a more cautious growth outlook. This inflationary pressure arises because transportation costs are a significant component of the overall cost of goods and services. As petrol prices increase, businesses will inevitably pass on the costs to consumers.

The ripple effect across various sectors will affect everything from food prices to the cost of transportation itself and this will reduce consumers’ disposable income and their ability to spend on non-essential items. The government should consider making adjustments to the existing service tax tariffs on various goods and services. The hikes in all sectors will only create an additional burden on consumers, diminishing their disposable income and reinforcing a cycle of reduced spending.

Even for those receiving targeted subsidies, logistical challenges in distribution and potential delays could disrupt household budgets. These factors combined will create a climate of economic uncertainty where consumers are more likely to save rather than spend. If this is the pattern, economic activity will be dampened, hence, hindering Malaysia's growth prospects.

The government acknowledges that these cuts may contribute to inflation, but it also aims to redirect funds towards social assistance programs for vulnerable groups. The balance between managing fiscal responsibilities and supporting economic growth will be crucial as Malaysia navigates these changes and impending economic challenges.

To mitigate the impact of RON 95 subsidy removal on the public, the government should implement a phased approach, starting with a smaller price increase to RM2.45 per litre instead of an abrupt jump to RM3.30. This gradual transition allows consumers and businesses to adapt to higher fuel prices, minimizing sudden inflationary pressures, particularly in essential sectors like transportation and logistics.

Effective mitigation measures, such as direct cash transfers to eligible households, are essential to ensure timely support for those affected. In addition, savings of approximately RM2 billion for 2024 can be achieved through subsidy rationalization. Transparency and public engagement are also crucial to drive public expectations and foster understanding about the rationale behind subsidy adjustments.

The Global Risks Report (GRR) 2025 identifies an economic downturn as a significant concern for Malaysia, ranking it as the top risk, alongside issues like labor shortages, inflation and food supply challenges. These risks are particularly relevant as they reflect a broader global trend where economic downturns are perceived as the leading threat across multiple regions, including Southeast Asia.

The report also highlights the indirect effects of tariffs such as reduced productivity and increased uncertainty that may lead businesses to adopt a "wait-and-see" approach on investments. The World Trade Organization (WTO) has noted that previous trade conflicts, particularly between the US and China, have had far-reaching impacts beyond targeted sectors, which was the overall effect on global economic stability.

For Malaysia, GRR 2025 underscores the importance of strategic risk management to navigate potential trade measures from the US and the need for resilience in a fragmented global landscape. Understanding negative impacts on economic growth and balancing fiscal consolidation will be crucial for policymakers and businesses to strive for sustained growth this year.



Maryam Zulkafly is a Research Analyst (Economy) at Institut Masa Depan Malaysia (MASA)

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.