Malaysia's growth expected to slow to 3% this year

U.S. President Trump has announced that tariffs will be imposed on a country-by-country basis, with Malaysia starting to impose a 24% tariff on Friday. Economists predict that this could impact Malaysia's Gross Domestic Product (GDP) by as much as 1.5%, leaving the annual economic growth rate at only 3%, which poses a downside risk to long-term growth prospects.

MIDF research economists point out that the U.S. market accounted for 13% of Malaysia's total exports last year. If exports to the U.S. decrease by 10%, it will impact Malaysia's export sector by 1.3%.

Exports Could Plummet by 5.8% At the same time, if the U.S. raises tariffs, it will also affect the demand from other countries in the region. Exports from Malaysia to other countries and regions such as Singapore, Taiwan, South Korea, Vietnam, Japan, and even China could also decrease by 10%, leading to an overall export decline of 5.8%.

Additionally, the economists believe that weakened production activity will reduce imports of semi-finished products, such as electronics, machinery, equipment and parts, and metal products.

"Considering the reduction in imports, the estimated impact of the slowdown in foreign trade on Malaysia's economic growth rate could be as high as 1.5%. However, supported by continued growth in domestic economic activity, the annual economic growth can still be maintained at 3%, which is lower than our original minimum forecast of 4.6%."

Regardless, MIDF research states that the extent of the impact from trade and production adjustments will depend on the scale of changes in final demand after the increase in sales prices, especially in the U.S.

"If businesses can absorb some of the rising costs, the price pressure passed on to consumers may be limited."

Economists add that the temporary supply shock caused by the U.S. imposing reciprocal tariffs will not lead to a sharp contraction in the global economy. However, compared to the previous U.S.-China trade tensions, the latest Trade War 2.0 involves other countries, which will have a more significant impact on global trade.

Nonetheless, economists believe that Malaysia's efforts to promote trade with BRICS countries and the ASEAN region will help mitigate the impact of slowing U.S. demand.

Escalating Trade Tensions Cloud Economic Outlook Additionally, Hong Leong Research economists note that the shadow of escalating trade tensions continues to loom over the economic outlook.

Currently, the firm maintains its economic growth forecast for 2025 at 4.9%. Economists believe that the implementation of these tariffs will have a significant impact on Malaysia's export sector, and if they become a long-term or permanent policy, they could pose a downside risk to Malaysia's economic growth.

Regardless, economists say that with favorable negotiations, economic growth still has potential upside, which could help eliminate the main uncertainties affecting market sentiment.

Currently, the tariff rate imposed by the U.S. on Malaysian export products is 24%, but about 26% of products imported from Malaysia are exempt from tariffs.

Compared to Vietnam and Thailand, Malaysia's Impact is Not Severe Mercury Securities economists also believe that compared to larger economies and even some ASEAN countries like Vietnam and Thailand, Malaysia is not as severely impacted by reciprocal tariffs.

However, they believe that the second-order effects of trade slowdown, supply chain shifts, and investment redirection could significantly impact the Malaysian economy.

"The government may focus on diversifying trade and upgrading industries to withstand headwinds. Moreover, Malaysia's regional integration and relative protection may provide some short-term breathing space, but Malaysia cannot escape the broader challenges posed by the intensifying global trade environment of protectionism."

They explain that while the direct impact of U.S. tariffs on Malaysia is relatively limited, Trump's reciprocal tariff policy will disrupt global trade flows, affecting Malaysia's main partners such as China, the EU, and ASEAN countries, which will indirectly impact Malaysia's export sectors, such as electronics, palm oil, and rubber products.

Five Affected Sectors Furthermore, economists have listed the Malaysian export sectors that will be affected:

1. Electronics and Electrical Products: Electronics and electrical products are Malaysia's largest exports, primarily sold to the U.S., China, and regional hubs. A slowdown in the supply chain or a shift in demand could affect chip manufacturers and component exporters.

2. Palm Oil: Malaysia directly exports palm oil to the U.S. and other markets affected by tariffs. New trade frictions may limit pathways, exacerbating protectionist sentiments and global competition.

3. Rubber Gloves: Malaysia is a major exporter of rubber gloves, especially to the U.S. While the impact of reciprocal tariffs is limited, if the U.S. seeks alternatives or other sources, demand will slow.

4. Machinery and Equipment: Malaysia's high-tech and industrial machinery exports to the U.S. may be affected by cost-sensitive buyers, as tariffs could