The global economy is in a state of flux. US trade and tariff policies have created uncertainties last witnessed during the COVID-19 pandemic. Whether or not the reciprocal tariffs announced on 2 April are eventually negotiated lower, US trade barriers are likely to be higher than before, thus weighing on global trade and also global GDP growth. The first blow will be felt to the US economy itself, where we have reduced our 2025 GDP growth forecast to 1.3% YoY, but the risks are clearly skewed to the downside from here if trade tensions remain elevated. The WTO has significantly downgraded its global merchandise trade from 3% to 0.2% YoY, stemming largely from escalating trade tensions including the intensifying US-China trade war which could lead to an expected 81% drop in their bilateral merchandise trade, ceteris paribus. Notably, North America trade is projected to slump by 12.6% YoY (2024: 2.3%), while that for Asia will slow to just 1.6% (2024: 8.0%).  If there is broader spillover of policy uncertainty, the WTO tips an even sharper drop of 1.5% YoY in 2025, albeit it tips a rebound to 2.5% in 2026.  The WTO also warned that such economic decoupling could cut global GDP by up to 7% in the long term. Additionally, the shift from a rules-based to a deals-based trading system has introduced heightened unpredictability and potentially undermines global economic stability. Our call for is the US Federal Reserve to cut its policy rate by a cumulative 75bps by the end of 2025. The degree of uncertainties around our calls are higher than usual given the changing global backdrop. This necessitates nimbleness around data releases and policy announcements.

The next biggest hit will be to China’s economy. 1Q25 GDP growth held steady at 5.4% YoY but the outlook for the rest of the year is less optimistic considering the escalating trade war with the US. Imports from China into the US face a prohibitive 145% tariffs, while imports from US into China face a 125% tariff. We forecast 2025 GDP growth at 4.6%, implying a significantly sharper growth slowdown in the coming quarters. We expect there will be some policy support to buttress against these downside risks to growth, but the scale and timing of further policy support is less clear. 

The escalating trade war will have an impact on global commodity prices. The downward prices on Brent and WTI since the start of the tariffs escalations has led us to revise down our 2025 Brent oil forecast to USD67/barrel from USD77/barrel, implying lower oil prices for the rest of the year. This is mainly on account of weaker demand and higher-than-expected supplies from the OPEC+ alliance. However, for Crude Palm Oil, we expect similar prices of MYR4,300/MT in 2025 compared to MYR4,218/MT in 2024. This reflects relatively stable supply conditions even as amidst less certain demand outcomes and ongoing domestic policy changes (namely for Indonesia’s B40).

The Malaysian economy entered this current period of global economic turbulence on strong footing. The economy grew a clip of 5.1% YoY in 2024 and incoming data suggests resilient, albeit slightly moderating, growth for 1Q25. Indeed, 1Q25 GDP growth slowed to 4.4% YoY. US President Donald Trump’s tariff announcements have jolted economies into understanding that trading relationships will change substantially from the current status quo. Importantly, no economy is off limits particularly if the US has a persistent trade deficit with it.

The US has had a persistent trade deficit with Malaysia since as early as 2000 and was a cumulative USD24.8bn in 2024. This contributed to a ‘discounted’ reciprocal tariff calculation of 24% imposed on US imports from Malaysia, effective 5 April. The decision is paused for 90 days from 9 April.

Notwithstanding the outcome of negotiations, Malaysia’s reciprocal tariff rate at 24% is lower compared to regional peers such as Vietnam (46%), Cambodia (49%), Thailand (37%) and Laos (48%), allowing it to maintain its relative competitiveness for firms still geared to export to the US. Moreover, for firms that have adopted a ‘China +1’ strategy, the relative attractiveness of Malaysia remains higher compared to Mainland China’s 145% tariff rate.

But this is not the end of tariff road for Malaysia. The exemptions of semiconductors and associated products has provided some temporary reprieve – about 46% of Malaysia’s exports to the US are still exempt from tariffs based on latest regulations (as of 14 April 2025). These include electronics and electrical appliances products, including electronic integrated circuits, photovoltaic cells, communication apparatus and automatic data processing machines. Importantly, the Trump administration has not ruled out the imposition of semiconductor tariffs, which is a large overhang for the economy.

We have lowered our 2025 GDP growth forecast to 4.3% YoY from 4.5%, previously. This mainly reflects the weaker external demand outlook as lingering uncertainties and higher tariff rates on US imports weigh on global exports. Simultaneously, we expect firms to turn more cautious with their expenditure plans, delaying capital investments and expansions, while households raise precautionary savings and hold back on big ticket expenditures. The balance of risks is still, however, to the downside.

The authorities will need to tap counter-cyclical policies to buttress against the near-term downside risks to growth. On the fiscal side, these measures could include sector-specific tax reprieves and targeted cash handouts. Counter-cyclical monetary policy measures could include allowing for more restructured debt obligation plans, managing FX fluctuations, to provide corporates and financial institutions with a sense of confidence, and potentially cutting interest rates if the growth slowdown becomes broad-based.

Importantly, a cloudy near-term outlook amplifies the need for a steadfast medium-term reform agenda. Malaysia’s authorities have made significant strides to bolster potential growth prospects over the past few years. The introduction of the New Industrial Master Plan (NIMP) 2030, the National Energy Transition Roadmap (NETR), the Johor-Singapore Special Economic Zone (JS-SEZ), the National Semiconductor Strategy (NSS) and the Public Finance and Fiscal Responsibility Law underscore the government’s commitment to strengthen key pillars of growth across sectors and regions within the economy.

The inflation backdrop has remained surprisingly benign. Headline inflation eased further to 1.5% YoY in February, with core inflation at 1.9% YoY. With global oil prices now around USD60-65/barrel, well below the government’s budget assumption of USD75-80/barrel. This suggests that headline inflationary pressures, while diluted by the presence of subsidies, will still likely remain low. Moreover, with the trade flow from Mainland China into ASEAN likely to continue in the near-term, the risk of higher inflation from tariffs is lower.

This will allow the central bank, Bank Negara Malaysia, to room to focus on growth risks in the near-term. While BNM is not an explicitly inflation targeting central bank, with a mandate “to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy”, growth risks could become a more dominant variable in its reaction function should global, and consequently domestic growth, slow sharply. We expect rate cuts to come in 2026 to the tune of 50bps but could come earlier if growth risks become more evident sooner. For the near-term, we expect BNM to remain vigilant of financial market volatility.

Short term, MYR may face some temporary respite due to the 90-day pause in reciprocal tariffs. But there is still risk that MYR may face some pressure from the recent rise in RMB volatility and potential hit on growth and sentiments from higher reciprocal tariff. To add, tariffs on semiconductor may also be imposed at some point, weighing on MYR outlook. On the other hand, there are also supporting factors that can help to mitigate external negativity, including sound economic fundamentals and USD trend. US protectionist measures, fading US exceptionalism and ballooning US debt are some catalysts driving the “sell USD on rally” trade as USD’s status as reserve currency and safe haven come under scrutiny. Should this broad USD weakness trend intensify again, then USDMYR projection may even be skewed to the downside.

It will be testing times ahead of Malaysia’s economy, but authorities can take solace in the fact that Malaysia is not alone. The global economy faces an unprecedented challenge to the order of rules-based goods trade. Nimbleness in policy responses and clear sightedness about longer-term structural reforms will hold Malaysia’s economy is good stead through these challenging times. No doubt, Malaysia’s economy has faced challenges in the past and come out stronger and more resilient. This time will likely be no different.