Will Growth Outpace Inflation in Malaysia?

As Malaysia crosses the halfway mark of 2025, economists, financial institutions, and policymakers are zeroing in on the nation’s mid-year economic review. The critical question on everyone’s mind: Will Malaysia’s projected economic growth continue to outpace the persistent threat of inflation?

Malaysia’s economy showed resilience through the first two quarters. Bank Negara Malaysia (BNM) reported a Q2 GDP growth of 4.8%, buoyed by consumer spending, moderate export performance, and steady domestic investment. However, headline inflation remained sticky, averaging around 2.9% for the first half, largely driven by rising food and energy prices.

The government’s forecast of 4.5–5.5% GDP growth for 2025, issued during Budget 2025, still stands, although risks have emerged from global trade uncertainties and regional currency pressures.

The services sector continues to dominate, contributing over 57% to GDP, with financial services, tourism, and digital commerce seeing robust activity. Manufacturing, although facing a slight slowdown due to weak global demand for electronics, remains resilient. Agriculture showed marginal gains, supported by higher palm oil prices.

Private consumption remains a primary growth engine, spurred by wage adjustments in the public sector and targeted fiscal stimulus. Yet, inflationary pressures on food and utilities are impacting household savings and debt levels.

Food inflation climbed to 4.2% in May 2025, a notable increase from Q1 averages. The removal of certain subsidies, especially in cooking oil and electricity, has exacerbated the cost-of-living burden. Core inflation, however, remains more contained at 2.5%, suggesting underlying demand remains healthy but manageable.

BNM has maintained the Overnight Policy Rate (OPR) at 3.25% since March, adopting a wait-and-see approach. While a further hike could curb inflation, it might also stifle private sector borrowing and SME activity.

The Malaysian Ringgit has seen minor depreciation against the US dollar, settling at RM4.76/USD in late June. While export competitiveness remains intact, import costs—especially for fuel and food—are feeding into domestic prices.

Trade data reveals a mixed picture. While E&E exports to the US and Japan have slowed, trade with ASEAN nations—especially Indonesia and Singapore—has expanded, driven by logistics, fintech collaboration, and green energy projects.

The Finance Ministry has reiterated its commitment to fiscal discipline, targeting a 3.5% deficit-to-GDP ratio for 2025. However, populist pressures ahead of state elections and increased social spending could pose challenges.

Revenue collection in H1 2025 was up by 6.3% YoY, largely due to higher corporate tax and GST compliance. Yet, spending on subsidies and flood mitigation measures has created new budgetary pressures.

A June 2025 survey by the Malaysian Institute of Economic Research (MIER) showed moderate optimism among businesses, especially in retail and healthcare. Foreign Direct Investment (FDI) inflows remained strong in green energy, logistics, and high-end manufacturing.

However, concerns persist over talent shortages, rising operating costs, and potential policy uncertainty in H2.

Analysts expect BNM to maintain the OPR at least until Q4, barring any external shocks. The second half of 2025 will be pivotal in determining whether Malaysia can navigate the narrow path between sustaining growth and controlling inflation.

The coming months will also see major infrastructure and digital economy initiatives rolled out under the Twelfth Malaysia Plan. These could provide the needed tailwinds to maintain growth momentum.