Economy edges up more than expected in the second quarter

Economic activity surprises markets to the upside: According to a preliminary reading, GDP growth edged up to 4.5% year on year in the second quarter, from 4.4% in the first quarter. The reading was better than markets had expected; a moderation in growth from the prior quarter had been forecasted.

Agriculture and services fuel momentum in Q2: Advance estimates showed that the agricultural sector grew 2.0% annually in the second quarter, picking up from the first quarter's 0.6% increase. Moreover, services growth improved to 5.3% in Q2 (Q1: +5.0% yoy). On the flipside, the industrial sector lost steam, growing 2.7% in Q2 (Q1: +4.0% yoy). Construction growth also fell to 11.0% in Q2, marking the softest reading since Q4 2023 (Q1: +14.2% yoy).

External shocks to weigh on GDP growth: In the remainder of the year, the Malaysian economy is poised to lose steam from H1’s level, capped by global trade uncertainty. The U.S. is threatening one of the highest ASEAN tariffs on Malaysia’s exports, which have comprised around 70% of GDP in recent years. Domestic demand will likely also feel the pinch of fiscal consolidation and elevated interest rates, with the Central Bank’s monetary policy easing cycle expected to trickle down in the economy later in the year. The outlook hinges on trade negotiations with the U.S.: Malaysian exports would be subject to a 25% tariff from 1 August unless a deal is reached. That said, even with a tariff deal in place, Malaysia would remain exposed to external sector shocks, with many of its key trading partners also facing the threat of higher tariffs.

Panelist insight: United Overseas Bank’s Julia Goh and Loke Siew Ting said: “Despite a stronger advance GDP growth for 2Q25 and a preliminary average growth of 4.4% for 1H25, we keep our cautious view for 2H25 given persistent tariff risks, geopolitical tensions and the implementation of domestic fiscal reform agenda. Furthermore, this 2Q25 advance GDP data has yet to fully factor in an expected further economic weakness in June, while the impact of domestic policy changes that took effect from 1 July on consumption and investments will only start to be reflected in 3Q25 data.”

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