Malaysia's economy likely grew 4.5% in second quarter: Reuters poll

Malaysia's economy expanded 4.5% year-on-year in Q2, maintaining a steady pace driven by resilient household consumption and strong services, which largely offset a significant decline in exports, down 3.5% in June. Amid global trade uncertainty and a weaker outlook, Bank Negara Malaysia implemented a pre-emptive rate cut in July, the first in five years, with further easing possible given the relatively strong ringgit. The 2025 growth forecast of 4.2% trails government targets, signaling continued headwinds from external demand.

Analysis

Malaysia's economy demonstrated a resilient but bifurcated performance in the second quarter, with GDP growth holding steady at 4.5% year-on-year, a marginal acceleration from the 4.4% seen in Q1. This stability is almost entirely attributable to robust domestic demand, evidenced by strong household consumption and corresponding growth in the services and manufacturing sectors. However, this internal strength is sharply contrasted by a deteriorating external environment. Exports, a critical growth engine, have become a significant drag, falling 3.5% year-on-year in June, driven by a pronounced 9.3% decline in shipments to China, the nation's largest trading partner. In response to this external weakness and rising global uncertainty, Bank Negara Malaysia executed a 'pre-emptive' interest rate cut in July, its first in five years. The relative strength of the ringgit, which has appreciated over 5% against the dollar year-to-date, provides the central bank with ample policy space for further easing if necessary. Looking ahead, the outlook remains cautious, as the consensus 2025 growth forecast of 4.2% trails the government's official target range of 4.5% to 5.5%, signaling that headwinds from trade friction and slowing global demand are expected to persist.

Key Decisions for Investors

• Investors should consider overweighting positions in Malaysian companies focused on domestic consumption and services, as these sectors show clear resilience, while exercising caution with export-oriented firms vulnerable to ongoing global trade weakness, especially those with high exposure to China.
• Monitor Bank Negara Malaysia's policy signals closely, as the pre-emptive rate cut and a strong ringgit suggest a dovish bias, creating a potential for further easing which could impact fixed-income yields and currency markets.
• Factor in continued macroeconomic headwinds, as the sub-target 2025 growth forecast and the explicit risk of U.S. tariffs indicate that external pressures are likely to cap the upside potential for the broader Malaysian market.