KUALA LUMPUR: Malaysia's economic growth is expected to moderate to 4.9 per cent in 2025, compared to the official target of 4.5 per cent to 5.5 per cent, according to the KSI Strategic Institute for Asia Pacific.
For 2024, the firm expects the gross domestic product (GDP) growth to be 5.2 per cent.
According to KSI, 2024 had been a stellar year for the Malaysian economy, thanks to the healthy domestic demand, robust investment activities, stronger external demand, and stable political climate.
It said Malaysia's expected growth in 2025 takes into account of the counter-reaction from the ongoing domestic policies and the heightened external challenges as the global economy braces for Trump 2.0.
KSI noted that previously, the Malaysian economy had benefitted from the previous Trump's protectionism policies, but being an open economy, Trump's tariff threats this time around can impact the local economy either directly or indirectly.
Nevertheless, KSI said the domestic demand will remain the main engine of growth.
"Private consumption will be underpinned by stable labour market, hike in civil service pay amounting seven to 15 per cent, revision in minimum wage and withdrawal of flexible Employee Providence Fund (EPF) Account 3 fund.
"Private investment will benefit from the spill-over from the realisation from ongoing approved investments and favourable financing environment," it added.
KSI said public investment is expected to moderate in 2025 due to flat development budget allocation for 2025 versus 2024.
The ongoing infrastructure project and the kick-off of GEAR-UP programme amounting RM25 billion in 2025 should lend support to government investment activities.
"Public consumption is expected to grow faster, reflecting higher operating expenditure allocation from 2025 Budget.
"External demand will be taking a back-seat in 2025 in-view of less favourable base and potentially cautious global sentiment amidst Trump's tariff threat," it noted.
Meanwhile, KSI said the domestic inflation is expected to rise in 2025, with inflation projected to average around 2.7-3.0 per cent versus the government's target of 2.0-3.5 per cent.
It added that the knock-on effect of the RON95 subsidy rationalisation is expected to be limited, as the subsidy removal targets a specific segment of the population, and the weightage of fuels and lubricating equipment in the consumer price index is relatively modest.
On the labour market, KSI said the unemployment rate is expected to reach 3.2 per cent at the end of 2025 as the job creation activity will be supported by the healthy domestic demand and ongoing realisation from approved investment activities.
On the monetary front, it said Bank Negara Malaysia is expected to keep the overnight policy rate unchanged at 3.00 per cent for the whole of 2025.
Unlike its global peers, Bank Negara has limited space to cut its policy rates due to anticipated domestic price pressure adjustments such as minimum wage hike, RON95 fuel subsidy rationalisation and the expansion of the sales and services tax.
"As per Bank Negara's guidance from November's meeting, the committee anticipates that inflation in 2025 will remain manageable.
"However, the risk of a rate hike would only arise if secondary-round inflationary effects prove stronger than expected, a scenario we consider to be of low probability," it noted.