Malaysia’s Economic Outlook Darkens Amid Escalating Global Tariff War

As global trade tensions escalate, Malaysia finds itself caught in the crossfire of a burgeoning tariff war, with economists slashing growth forecasts for the nation’s RM1.93 trillion economy. The intensifying conflict, marked by punitive tariffs between major powers like the United States and China, threatens to disrupt supply chains, dampen corporate earnings, and stall the record-high foreign investments Malaysia secured last year. With the trade-to-GDP ratio at a staggering 149.1% in 2024, the country’s exposure to global economic turbulence leaves little room for shelter, raising urgent questions about its economic resilience in the face of a potential worldwide recession.

Trade War Takes a Toll on Growth Projections

The tariff war, which has seen the United States impose a 24% tariff on Malaysian goods—higher than Singapore’s 10% but lower than Vietnam’s 46%—has triggered a wave of downward revisions in economic forecasts. CIMB Securities recently cut its 2025 GDP growth projection for Malaysia to 4% from an initial 5%, while Maybank Investment Bank Research adjusted its estimate to 4.3% from 4.9%. OCBC Bank, meanwhile, trimmed its forecast by 0.2 percentage points to 4.3%. These revisions reflect growing concerns over global macroeconomic conditions, with some analysts suggesting this may only be the first round of downgrades if trade disruptions worsen.

The US-China trade conflict lies at the heart of this uncertainty. China, hit with a staggering 104% tariff by the United States, retaliated with an 84% tariff on American products, a move that has sent shockwaves through global markets. Malaysia, with 13.2% of its 2024 exports directed to the US and a combined 33.3% to the US, China, and the European Union, is particularly vulnerable. As Lee Heng Guie, executive director of the Socio-Economic Research Centre, told StarBiz, the impact of a full-blown trade war on the world economy—and its spillover effects on Malaysia—should not be underestimated. He warned of higher inflation, increased business costs, and reduced demand, which could stifle output and investment across the board.

Monetary Policy and Fiscal Stimulus in Focus

Amid these challenges, policymakers face difficult choices. Bank Negara, Malaysia’s central bank, may be compelled to cut interest rates to stimulate growth, despite Governor Datuk Seri Abdul Rasheed Ghaffour’s reported stance that monetary policy is “not the best tool” to address trade wars. Other nations, such as India and New Zealand, have already lowered rates in anticipation of a global slowdown, with India signaling further cuts. For Malaysia, however, rate reductions carry risks, including potential volatility in the ringgit, as noted by industry experts.

Alternatively, fiscal stimulus could re-emerge as a viable option. Mohd Sedek Jantan, head of investment research at UOB Kay Hian Wealth Advisors Sdn Bhd, suggested to StarBiz that “fiscal stimulus may be back on the table” if trade conditions deteriorate further. Such measures could provide a buffer against declining demand, though they would likely strain public finances at a time when economic uncertainty already looms large. Mohd Sedek also cautioned that a 1% drop in global GDP could shave nearly 0.38% off Malaysia’s growth, underscoring the interconnectedness of the country’s economy with global trends.

Investment and Export Concerns Mount

Beyond immediate growth concerns, the tariff war threatens to derail Malaysia’s recent success in attracting foreign direct investment (FDI). Last year, the country achieved a record-high RM378.5 billion in approved investments, but analysts now question whether multinational corporations will reconsider their strategies. The data center sector, a key area of growth, could face delays as businesses adopt a wait-and-see approach amid supply chain disruptions. Mohd Sedek estimated that FDI inflows could fall by 10% from the RM170.4 billion recorded in 2024 if US-China trade negotiations falter or if the reliability of the US as a trade partner comes into further question, representing a “moderate 20% risk of reversal.”

Exports, a cornerstone of Malaysia’s economy, are also under pressure. While semiconductor exports—accounting for a third of total exports to the US—remain exempt from reciprocal tariffs for now, OCBC Bank warned that this reprieve may be temporary. If tariffs are extended to semiconductors, the impact on Malaysia’s GDP growth could be significant. Lee Heng Guie echoed this concern, noting that the tariff war could lead to a cautious approach to capacity expansions, slowing both domestic and foreign private investment. Small and medium enterprises (SMEs), which often depend on larger export-oriented firms for orders, may face reduced production capacity, layoffs, or even closures as demand weakens.

Global Recession Risks and Regional Buffers

The broader global outlook adds to Malaysia’s woes. Global brokerages, including JP Morgan, have raised the odds of a worldwide recession to 60%, a sobering reminder of the stakes involved. As trade becomes more expensive and supply chains fracture, economists predict slower global growth in 2025, with ripple effects already visible in financial markets. For Malaysia, the impact is expected to intensify from the second quarter of 2025 onward, with nine out of ten economists forecasting weaker GDP growth compared to the first quarter.

Yet, some regional dynamics offer a glimmer of hope. Mohd Sedek pointed out that China is increasingly shifting its exports to ASEAN countries, potentially creating new opportunities for Malaysia. Additionally, Asian central banks are taking proactive measures to mitigate the fallout, which could provide a buffer against the worst effects of the tariff war. These developments, while not a complete solution, suggest that Malaysia may have some tools to weather the storm if it can navigate the challenges ahead.

Balancing Risks and Resilience

As Malaysia grapples with the fallout of the tariff war, the road ahead remains uncertain. The government and businesses alike must strike a delicate balance between mitigating immediate risks and preserving long-term economic stability. For now, the consensus among analysts is that while Malaysia’s economy is likely to grow above 4% in 2025, the trajectory depends heavily on the evolution of global trade tensions. If businesses freeze hiring or delay investments, as Mohd Sedek warned, the downturn could become self-fulfilling. “The answer isn’t panic—but it sure isn’t denial either” he told StarBiz, encapsulating the cautious pragmatism that defines the current mood.

The coming months will test Malaysia’s ability to adapt to an increasingly hostile global trade environment. With the specter of a global recession looming and the potential for further tariff escalations, policymakers face mounting pressure to safeguard the economy. Whether through fiscal stimulus, strategic trade partnerships, or targeted support for vulnerable sectors like SMEs, the decisions made now could shape Malaysia’s economic future for years to come. As the tariff war unfolds, one question lingers: can Malaysia turn adversity into opportunity, or will it be swept up in the global economic tide?