Economic Focus: 2Q25: Robust domestic demand

Malaysia's economy grew 4.4% y-o-y and 2.1% q-o-q on a seasonally adjusted (SA) basis in 2Q25 (1Q25: +4.4% y-o-y; +0.7% SA q-o-q), which was slightly below the advance estimate of 4.5%. This takes 1H25 GDP growth to 4.4%, in line with the government's recently revised GDP growth target of 4.0%-4.8%. The steady 2Q25 GDP performance was largely attributed to the strong growth in domestic demand (+7.0%), partially offset by weak external trade (-72.6%) which contributed to a 2.6% growth drag. It is noteworthy that 2Q25 was affected by US baseline tariffs of 10% which took place in Apr 2025, and net export activities slowed down considerably during the quarter after the front-loading activities in 1Q25. 

2Q25 domestic consumption continued to be boosted by sustained expansion in the labour market as unemployment rate dipped to a 10-year low of 3.0% in Jun 2025 with historic high labour force participation rate. Unsurprisingly, strong household spending remains as the cornerstone of Malaysia's growth driver as reflected in firm discretionary spending. This is set to be further boosted in 2H25 by the disbursement of an additional RM2bn in one-off financial aid and a 25 bps interest rate cut by Bank Negara Malaysia. Meanwhile, 2Q25 capital expenditure continued to sustain its growth momentum at 12.1% (1Q25: +9.7%), signifying the positive impact arising from record-high approved investments in 2021-2024 and various government-led strategic developments under national blueprints. We believe the positive investment upcycle in Malaysia will continue to provide further tailwinds in the near term. On the other hand, government expenditure increased by 6.4% (1Q25: +4.3%) on higher emoluments and services.

Within the Services sector (60% of 2Q25 GDP; +5.1% y-o-y), the Wholesale & Retail Trade sub-sector grew by 4.3% y-o-y (vs 4.3% in 1Q25) while Transportation and Storage sub-sector growth remained steady at 8.6% y-o-y (vs 9.5% in 1Q25). Meanwhile, the Construction sector maintained its double-digit growth of 12.1% (vs 14.2% in 1Q25) given robust growth in non-residential and special trade sub-sectors. The Manufacturing sector's growth momentum moderated slightly to 3.7% y-o-y in 2Q25 (vs 4.1% in 1Q25), as the 8.2% y-o-y increase in the E&E industry was weighed down by disruptions in refined petroleum production (-3.3% y-o-y).

We are cautiously optimistic of Malaysia's economic outlook, and project 2025 GDP growth to come in at a relatively healthy pace of 4.3%. Malaysia is set to benefit from firm domestic demand, underpinned by robust labour market and strong economic activities. Meanwhile, our diversified export composition and non-aligned policy that priorities economic cooperation and integration will stand it in good stead amid heightened trade conflicts. We believe Malaysis is currently in a position of strength to weather the adverse impact arising from further escaltation in geopolitical tensions and protectionist measures, especially after the pre-emptive 25 bps interest rate cut by Bank Negara Malaysia to preserve Malaysia's steady growth trajectory.