Malaysia’s economy grew 4.5% year-on-year (YoY) in the second quarter of 2025, according to advance estimates released by the Department of Statistics Malaysia (DOSM). Amid global uncertainty from softening exports to looming U.S. tariffs the headline number looks promising.
Growth Driven by Construction and Services
According to DOSM’s figures, the construction sector surged by 11.0% YoY, while the services sector expanded by 5.3%, making them the two key growth drivers in Q2. Yet both sectors heavily depend on domestic factors: public infrastructure spending and household consumption.
The government fast-tracked capital expenditures through projects like MRT3, the Pan Borneo Highway, and affordable housing schemes. While these initiatives have a short-term multiplier effect, they don’t replace the need for productivity-driven growth from tradable sectors such as manufacturing and exports.
Notably, the manufacturing sector grew by just 3.8%, and the mining and quarrying sector contracted sharply by 7.4%, reflecting persistent structural weakness in output and external demand.
External Risks Persist: Falling Exports, Tariff Pressures
On the trade front, the picture remains cloudy. Malaysia’s exports fell 3.5% YoY in June, marking the second consecutive month of decline. Key products electronics, rubber gloves, and palm oil faced weaker global demand and soft commodity prices.
More worryingly, the U.S. is considering imposing 25% tariffs on a list of Malaysian goods, as part of a broader protectionist trade stance. If implemented, this would hit Malaysia’s competitiveness, especially in sectors like electronics and medical devices.
In contrast, regional peers like Vietnam (6.2% GDP growth) and Indonesia (5.1%) appear to be leveraging stronger export and foreign direct investment momentum. Malaysia’s over-reliance on domestic fiscal measures exposes it to medium-term vulnerabilities.
Domestic Consumption and Monetary Easing: Recovery Pillars or Illusion of Stability?
Domestic demand remains one of the few bright spots. Easing inflation and the first interest rate cut by Bank Negara Malaysia (BNM) in five years have improved sentiment. But key indicators suggest this recovery is still fragile.
SMEs remain under pressure, according to SME Corp Malaysia, and real household income has yet to fully rebound. Meanwhile, although the unemployment rate hovers around 3.3%, underemployment and stagnant wage growth remain challenges.
Fiscally, programs like BUDI MADANI and targeted subsidies have helped maintain purchasing power. But how long can the government afford to support growth via spending, given that the fiscal deficit remains above 5% of GDP and federal debt is edging past 60%?
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Growth Does Not Equal Resilience
The 4.5% GDP figure is respectable, especially after Q1’s contraction but does not yet reflect a broad-based, structural recovery. Malaysia’s economic expansion in Q2 is heavily driven by construction and domestic consumption, not by sectors that guarantee long-term competitiveness like manufacturing and exports.
With final GDP data set for release on August 15, all eyes will be on whether growth is truly inclusive and sustainable, or whether it’s simply concentrated in stimulus-dependent sectors.
In the current environment, resilience should be the true measure of growth. To turn this rebound into real recovery, Malaysia must pursue a balanced economic strategy that combines domestic support with export competitiveness and structural reform.
Reference:
- https://www.dosm.gov.my/
- https://www.bnm.gov.my/
- https://www.reuters.com/world/asia-pacific/malaysias-economy-grew-45-yy-q2-advance-estimates-show-2025-07-18
