Economic Focus: Anchored by steady domestic demand

Notwithstanding the challenging global environment arising from US trade protectionism and escalating geopolitical conflicts, global economic growth trajectory has remained resilient thus far. While moderation in global trade in 2H25 is expected given the reciprocal tariffs imposed on US imports, global equity indices have been scaling record highs amid global monetary easing cycle. The IMF has upgraded its 2025 global growth forecast to 3% in Jul 2025 from 2.8% in Apr 2025 after the less-than-initially feared economic fallout from US tariffs and stable global financial conditions. On the domestic front, Malaysia's 2Q25 economy grew by 4.4% y-o-y (1H25 +4.4%) as strong domestic demand (+7% y-o-y) more than offset the weak external trade (-73% y-o-y) 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.

We believe the strong domestic demand will continue in 2H25 on sustained household spending, further realisation of investment projects and robust tourism activity. In addition, the 19% US tariff on Malaysian exports puts the country on par with the rates imposed on competing ASEAN peers which may help preserve Malaysia's competitive advantages in the US trade, though export-oriented businesses will still feel the brunt of higher cost. Evidently, Jul 2025 credit demand remained on a healthy growth trend at 5.4%, slightly higher than the 5.1% growth in Apr 2025 when the sweeping reciprocal tariffs were first announced. In addition, the first BNM interest rate cut of 25 bps to 2.75% in five years will serve as a catalyst to boost market sentiment, coupled with government's concerted efforts to alleviate cost of loving for the people.

The recently announced 13th Malaysia Plan (13MP) shares the guiding principles of Madani Economy Framework of achieving sustainable and inclusive growth as well as driving governance reforms. Broadly, the 13MP (2026-2030) aspires to growth annual GDP by 4.5%-5.5% while keeping fiscal deficit <3% and government debt <60% by 2030 which is in line with the Fiscal Responsibility Act. More importantly, Budget 2026, to be unveiled on 10 Oct, will lay the foundation for the 13MP. Continuous progress for reform initiatives including tax revenue expansion and subsidy retargeting can be expected while growth drivers such as digital adoption, renewable energy and industrial transformation will remain in focus. Meanwhile, Visit Malaysia 2026 will be a key catalyst for Malaysia's 2026 economic growth. We believe fiscal consolidation remains on track in 2026 with a lower fiscal deficit of ~3.5% (vs 3.8% in 2025, 4.1% in 2024).