With the return of President Donald Trump to office, a renewed focus on protectionist policies, such as broad-based tariff hikes, is anticipated. The implementation of these measures may take time amid complex global trade networks. This may provide economic actors enough headroom to adapt to the changing trade landscape. But with deportation of illegals in the U.S., the country’s economy will most likely slowdown.
Meanwhile, the eurozone and China face their own sets of challenges. Germany faced another year of contraction in 2024 due to weakness in their manufacturing sector. This stems from high energy prices and elevated financing costs. On the other hand, China faced the challenge of revitalising domestic demand amid renewed risks of higher tariffs from the US. Stimulus measures, including additional interest rate cuts, have been announced to address these challenges. Nevertheless, both the eurozone and China are expected to achieve only modest economic growth in 2025.
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Malaysia’s economy is set to grow at 4.5 - 5.0% in 2025. It will be driven by the accelerated implementation of projects outlined in various national development plans, adequate external demand, and broad-based sectoral expansion. Sectors such as construction and agriculture are likely to remain stable, given: i) accelerated progress in ongoing public infrastructure, ii) continued expansion of data centres, and iii) increased palm oil demand due to Indonesia’s upgraded mandates for biodiesel to 40% of fuel composition.
Private consumption, a major contributor to Malaysia’s 2024 economic growth, is projected to remain robust in 2025. This will be driven by the increment of civil servant salaries, increase in minimum wage to RM1700 from RM1500, as well as withdrawals from Employees Provident Fund Account 3. Additionally, private consumption will benefit from an improving employment rate and rising private sector wages, as observed in 3Q2024.
Globally, inflation will remain a key indicator to monitor in 2025. Despite the US Federal Reserve's interest rate policy, inflation has struggled to reach its preferred 2% target throughout 2024. In the eurozone, inflation briefly fell below the 2.0% target in September but inched higher thereafter due to rising services costs. This will shape the respective central bank’s monetary policy.
In Malaysia, inflationary pressures are anticipated with measures like rationalisation of subsidies and widened scope of the Sales and Services Tax. Furthermore, wage hikes could drive domestic demand and push prices upward. Headline inflation may average 2.6 – 3.5% in 2025 (2024F: 1.9%) (upper end is the writer’s own assessment). Therefore, contained inflation and strong GDP growth of around 5.0% suggest flexibility for Malaysia’s central bank to keep the Overnight Policy Rate unchanged at 3% in 2025. In consideration of Malaysia’s economic growth and stable interest rate outlook, USD-MYR may average around 4.40-4.50 in 2025 (range is more of the blog writer’s estimate), as the Fed’s anticipated moderation of its interest rate cuts will likely limit the extent of the ringgit’s appreciation.
As mentioned previously, we need to remain agile, creative and flexible to overcome a slew of measures anticipated under Trumponomics 2.0. The key problems we face as usual are not addressed and are treated as structural problems – more inclusivity; focused needs-based policies; and liberalisation of existing regulatory framework. To have dynamic growth we must face the ‘elephant in the room”. Structural reforms please! But PMX has thus far not shown the guts to do it!
Reference:
2025 Macroeconomics Outlook: Growth to sustain amid monetary easing protectionism, MARC Ratings Berhad, 9 January 2025
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