Domestic demand steadies growth

The Star

05-05-2025

PETALING JAYA: Malaysia's economic growth for the first quarter ended March 31, 2025 (1Q25), is expected to be in line with the recently released advance gross domestic product (GDP) estimate of 4.4%.
Most economists whom StarBiz spoke to had GDP projections that aligned with the advance estimate, noting that domestic demand likely anchored growth in 1Q25 amid trade tensions and uncertainties.
Bank Negara is set to release the preliminary 1Q25 GDP data on May 16, which is expected to show a moderation in growth from 5% in 4Q24.
The government's growth projection of 4.5% to 5.5% for the year may be revised given the recent developments.
MARC Ratings Bhd chief economist Ray Choy
MARC Ratings Bhd chief economist Ray Choy expects GDP growth to be in the region of 4.5%.
He said the main drag would come from the mining and quarrying sector, caused by a decline in oil and gas revenues and a high base effect from 1Q24.
However, Choy said consumer demand would likely remain supportive of growth, mainly due to the increase in civil servants' salaries, the rise in minimum wages and stable employment conditions.
He noted that demand from wholesale and retail trade during the festive season in 1Q25 is expected to help drive growth.
'Growth in the construction sector and the electrical and electronics sector was likely healthy in the said quarter due to ongoing transport infrastructure upgrades and various urban renewal projects, alongside healthy demand for semiconductors,' he said.
Choy has projected an annual GDP growth of 4.4% this year, cautioning that domestic demand may slow due to external uncertainties stemming from US tariffs and the effects of the trade war on global demand.
'Financial market volatility will also affect consumer sentiment and cause some wealth destruction.
'However, domestic demand growth will likely remain above 5%, premised on increases in civil servants' salaries, higher minimum wages and stable employment conditions.
'Typically, consumer demand growth does not fluctuate drastically compared to other sectors, such as manufacturing investments and construction,' he added.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
RAM Rating Services Bhd senior economist Woon Khai Jhek said the GDP deceleration for 1Q25 was within the rating agency's expectations.
'One of the key factors for the deceleration was the mining sector.
'This is to be expected amid a natural gas production facility shutdown in Sarawak in 1Q25, which resulted in a 6% contraction in the Industrial Production Index (IPI) for the mining sector during the January to February 2025 period.
'Hence, the sharp 4.9% contraction in mining output, as indicated by the advance estimates for 1Q25 (4Q24: 0.9%), (and) its drag on overall GDP growth comes as no surprise,' he said.
Woon said the anticipated slowdown in the services sector also dragged overall growth lower. The advance estimates put services growth at 5.2% in 1Q25, easing from 5.5% in 4Q24.
'We had expected it in anticipation of a continued moderation in wholesale and retail trade activities, which averaged 3.9% in January to February 2025 (4Q24: 4.4%).
'There was also some anticipated drag from electricity generation, as the IPI for electricity contracted by 1.5% in January-February 2025 (4Q24: 3.1%),' he said.
Drilling down further on domestic demand, Woon said public and private investments are expected to drive growth through the continued rollout of multi-year infrastructure projects and greater realisation of approved investments.
These factors are expected to provide the necessary support and buoy Malaysia's overall GDP growth this year, he added, noting that the rating agency has revised its annual GDP forecast to between 3.5% and 4.5%, down from 4% to 5%.
He said much of the year's outlook depends on tariff negotiations, counterbalance measures and regional trade initiatives that could materialise in the near to medium term.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the 1Q25 advance estimate growth was within the bank's expectations for a moderate start to the year.
He said despite the boost from the festive seasons of Chinese New Year and Hari Raya Aidilfitri, the headline number was somewhat underwhelming.
'Looking ahead, while domestic demand is expected to remain the main growth driver, we anticipate some moderation in 2025.
'We have downgraded our GDP growth forecast to 4.1% for this year, reflecting a softer-than-expected start to the year and increasing downside risks from the external front, including heightened geopolitical tensions and the recent escalation in US tariff measures, which could weigh on exports and investor sentiment.
'Private consumption will likely grow at a more measured pace, while investment will continue to lend support, particularly in infrastructure and manufacturing sectors.
'Overall, we expect domestic demand to grow slightly below its long-term trend, underscoring the need for continued policy support and strategic investments to sustain growth amid a challenging global backdrop,' Mohd Afzanizam said.
Sunway University economics prof Yeah Kim Leng
Sunway University economics professor Dr Yeah Kim Leng has projected domestic demand growth to be the main anchor of growth for the year, with a forecast range of 4.7% to 5.2% – slower than the 5.3% growth achieved in 2024.
Private consumption and investment will be the main drivers of domestic demand in the face of highly uncertain and softening external demand, he said.
Yeah pointed to the advance 1Q25 GDP data, which showed that retail trade has held up well, expanding 5.4% in the first two months of the year.
'Internally, the overriding imperative for policymakers is to shield the country from the economic turbulence caused by the ongoing US tariff threats, while continuing to strengthen the competitive foundations of the economy.
'These include expediting investments, diversifying trade, and continuing the reform agenda to improve government administrative efficiency and strengthen the national education and health systems, while engaging with the private sector to raise wages, skills and productivity levels,' Yeah noted.
OCBC Senior Asean economist Lavanya Venkateswaran
OCBC Bank senior Asean economist Lavanya Venkateswaran said resilient private consumption and a continued focus on infrastructure spending helped support economic growth for Q125.
'We forecast 2025 GDP growth of 4.3% year-on-year (y-o-y) with the risks skewed to the downside.
'The challenges for the Malaysian economy will be the headwinds mainly from the external front, which will likely have a knock-on impact on domestic demand,' she said.
HSBC economist Yun Liu
HSBC Asean economist Yun Liu said Malaysia's 1Q25 advance GDP growth of 4.4% y-o-y was a small surprise, as it was below the bank's original forecast of 4.9% y-o-y.
Trade headwinds are likely to intensify despite the 90-day pause on the Liberation Day tariffs announced April 2. She said besides trade, foreign direct investments would also be affected due to the unprecedented uncertainty, making investors more cautious and adopt a 'wait-and-see' approach.
'That said, there are still green shoots. For one, the trade negotiations are underway as we wait for more clarity on the direction of tariffs after 90 days.
'In addition, Malaysia's trade is also diversified by products and trading partners,' she said.
Liu said on a relative basis, Malaysia compares well for domestic resilience relative to its peers, with decent private consumption and public investments expanding at a strong pace.
This means the domestic resilience can partially mitigate some external risks.
'We have lowered our 2025 GDP growth (forecast) to 4.2% (from 4.8%) for Malaysia, and we believe this may prompt more policymakers' responses.
'We are now penciling in a 25 basis points rate cut from Bank Negara in July,' Liu said.