Bank Negara lowers growth forecast

The Star

4 days ago

PETALING JAYA: Bank Negara believes the Malaysian economy is facing external headwinds from a 'position of strength', as it announces a new gross domestic product (GDP) growth forecast of between 4% to 4.8% for Malaysia.
The latest projection is a fractional downgrade from between 4.5% to 5.5% previously, although the central bank emphasised that latest indicators, including advanced estimates for the second quarter growth, continue to point towards sustained strength in economic activity.
While marginal, the lower forecast is nonetheless noticeable, in the context of global growth outlook that is being affected by shifting trade policies and uncertainties surrounding tariff developments.
Furthermore, the renewed projection has also led economists to chorus that it is crucially vital for Malaysia to secure a beneficial tariff position with the United States before Aug 1, in light of what Vietnam and Indonesia have done, to reinstate the former's more favourable trade position.
In a statement released yesterday, Bank Negara stressed that resilient domestic demand will continue to support growth going forward, as decent labour market conditions, particularly in domestic-oriented sectors, and policy measures will continue to underpin private consumption.
The central bank acknowledged that the updated growth projections account for various tariff scenarios, ranging from a continued elevation of tariffs to better trade negotiation outcomes.
'This forecast remains subject to uncertainties surrounding the global economy, both on the downside and upside,' it said.
Senior economist at United Overseas Bank (UOB) Julia Goh perceives that the central bank's new position on Malaysia's growth prospects is the impact of a prolonged uncertainty surrounding the tariff situation.
She said Bank Negara has also taken into account the slower growth trajectory that is seen in the first half of 2025 (1H25) and projected moderation in 2H25.
'We continue to see scope for a potential 25 basis points (bps) overnight policy rate (OPR) cut in 4Q25, though it will depend on the extent of downside risks from trade and slower export demand, as well as effects of domestic policy reforms and fiscal expansionary measures in the upcoming budget,' she told StarBiz.
Professor of economics at Sunway University, Dr Yeah Kim Leng, recognises that weakening global demand has softened Malaysia's external outlook, reducing earlier expectations of stronger contribution from external trade and foreign investment to Malaysia's growth.
Nevertheless, he noted that domestic consumption and investment, coupled with higher government spending are expected to underpin Malaysia's GDP for 2025, before adding that the GDP growth of 4% to 4.8%, if realised, is still commendable in light to the strong headwinds facing the global economy amid geopolitical turbulence and trade war uncertainties.
Together with a better than expected 4Q25 GDP out-turn of 4.5% amid low inflation, Yeah reckons Bank Negara is in a comfortable position to provide the necessary financial and monetary conditions to support continuing growth as well as ensure a conducive environment to anchor structural reforms that will further strengthen consumer and investor confidence.
Asean economist at HSBC, Yun Liu, opined this downward revision of GDP growth forecast for this year from Bank Negara is largely expected, and the magnitude of the adjustment is not as significant as other regional peers.
Seeing the glass as half full, she views GDP growth in 1H25 to be 'decent', before commenting that while a large part was thanks to front-loading trade activities before the higher levies come into effect, other sectors, particularly services, had remained robust.
Of interest, and in variance from Goh's stance, Liu said despite growth being the primary concern in Bank Negara's reaction function, she believes the 25bps rate cut in July by the central bank is a one-off insurance cut to pre-empt possible negative spillovers to the economy, and not to open the door for easing.
'We do not expect another rate cut in this easing cycle, although a lot would depend on the trade negotiations ahead of the Aug 1 deadline.
'It is not only about the absolute tariff level Malaysia faces, but also about the relative tariff rate between Malaysia and regional competitors,' she told StarBiz.
Doris Liew, an economist specialising in South-East Asian development, concurs that Malaysia's trade performance has been partly affected by global tariff tensions and supply chain uncertainties, particularly involving the United States.
In response to these concerns, she observed that some exporters have front-loaded shipments to the United States, a trend that may taper off in 2H25.
Liew said: 'However, growth in 1H25 has remained moderate, staying below 4.5%, and is noticeably slower than the same period last year.
'This suggests that front-loading alone has not significantly bolstered economic performance, and a subsequent slowdown in export activity could weigh further on overall growth momentum.'
She cautioned that the United States remains a critical trade partner, accounting for around 20% of Malaysia's exports, and as such, preserving lower tariff access is thus important for maintaining Malaysia's comparative advantage in key sectors.
'If global trade headwinds persist, further monetary policy easing may be on the horizon. With inflation remaining relatively stable, Bank Negara retains policy space to support growth through rate cuts without stoking inflationary risks,' Liew pointed out.
While economist Geoffrey Williams also believes that the growth downgrade by Bank Negara has been widely signalled, he suspects that that GDP growth will be closer to 4%, down by at least 1% year-on-year.
'This is mostly due to tariffs. Although total trade and exports have been strong, it is net trade that matters for growth and this has been squeezed very much by front-loading and volatility due to the delayed tariff negotiations,' he said.
Like Liew, Williams thinks it is essential for Malaysia to secure a good tariff deal to remain competitive against other countries such as Vietnam and Indonesia.
The economist estimated the impact of a less-than-favourable tariff deal would result in a growth decline of 1%, or RM20bil, and Malaysia should do its best to avoid such an outcome, as this would be the cost of protecting Malaysian markets, or maintaining bumiputra preferences for example.
'The OPR cut should keep growth within the new forecast range so there is no need for further cuts,' said Williams, in agreement with HSBC's Liu.
Separately, Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour said the country's economy remains resilient despite global uncertainties, which is in part, the outcome of structural reforms that the central bank has undertaken over the years.
'The sustained strength in economic activity and moderate inflation provides a supportive environment to pursue structural reforms for a more resilient and competitive Malaysia in the future,' he said.