OECD Economic Outlook, Volume 2025 Issue 1

Malaysia

GDP is projected to grow by 3.8% in 2025 and 4.1% in 2026. Domestic demand will be the main driver of growth. Private consumption will remain robust, supported by favourable labour market conditions. Investment growth will benefit from new opportunities in technology-intensive sectors, although global trade tensions are generating significant risks. Inflation is expected to rise amid a planned removal of fuel subsidies and potential wage pressures.

Government debt has increased to 64.6% of GDP in 2024. Fiscal consolidation is needed to rebuild fiscal space, including by mobilising more revenues and phasing out energy subsidies. The neutral monetary policy stance should be maintained in the short term. Substantial gender gaps are hampering women’s economic opportunities, which could be addressed by investing more in childcare support and promoting workplace flexibility. Reducing skill mismatches could boost both growth and social inclusion.

The economy has been growing steadily

Real GDP grew by 5.1% in 2024, largely driven by private consumption and to a lesser extent investment. After a small contraction in late 2024, GDP growth rebounded in the first quarter of 2025, with 0.7% growth quarter-on-quarter on a seasonally-adjusted basis. Inflation has been contained, with neither annual headline nor core inflation exceeding 2% since August 2024, despite an uptick in core inflation in early 2025. Meanwhile, the labour market has been strong as unemployment fell to 3.0% in March 2025, its lowest level since April 2015, while labour force participation rose to an all-time high of 70.7% in the same month.

Exports grew strongly in 2024 and shipments to the United States, Malaysia's third largest export destination, accounted for about the half of the growth of merchandise exports. Exports to China, the country's second largest export market, declined by 2.2%. Due to strong import growth, however, net exports made only a marginal contribution to growth. These trends continued in the first three months of 2025. Tourist arrivals have now recovered to well above their 2019 levels. Exports to the United States accounted for 13.2% of merchandise exports and 10.3% of GDP in 2024, and a 10% tariff is now being applied to merchandise imports from Malaysia, although there some exemptions for particular products.

Malaysia

Source: CEIC.

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Malaysia: Demand, output and prices

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Fiscal consolidation is set to continue as monetary policy remains neutral

The fiscal deficit fell from 5.0% in 2023 to 4.1% of GDP in 2024, and the government is appropriately committed to continuing fiscal consolidation through various spending and revenue measures, including a better targeting of fuel subsidies towards low-income households and broadening the base of the Sales and Service Tax. The lower deficit will help bring down government debt, which has increased rapidly from 52.4% of GDP in 2019 to 64.6% in 2024 and create fiscal space to address rising long-term spending pressures related to social protection and climate change. The central bank has maintained the policy rate at 3% since July 2023, which is a broadly neutral monetary policy stance. This stance is expected to continue, although the central bank should remain vigilant in the face of emerging inflationary pressures from the continued withdrawal of fuel subsidies, increases in the minimum wage and civil servants’ salaries, and tight labour market.

The economy will grow moderately, but faces significant downside risks

Output is projected to grow by 3.8% in 2025 and 4.1% in 2026. Private consumption will be buoyed by favourable labour market conditions, although the withdrawal of fuel subsidies will weigh on the real purchasing power of some households. Private investment will be supported by new opportunities in technology-intensive sectors. Infrastructure projects and investments by public corporations will support public investment. Inflation is projected to rise slightly to 2.2% in 2025 and 2.7% in 2026, reflecting progress in fuel subsidy withdrawal. Export growth will be affected by global trade tensions and high levels of uncertainty, which could have more negative effects than currently assumed, particularly if tariff rates rise further. On the domestic front, stronger than expected inflationary pressures remain a downside risk.

Structural reforms can reduce inequalities and make growth more sustainable

Improving the targeting of social protection while raising social assistance coverage and benefit levels would allow stronger reductions of poverty and inequality. Policies to bridge the gender gap, including improving access to affordable childcare and extending paid maternity and paternity leave periods, would allow more women to participate in the labour market and find jobs that match their skills. Measures to reduce skill mismatches, such as expanding the skills registry and investing more into adult education, could boost both growth and social inclusion. Addressing climate change requires accelerating the planned withdrawal of energy subsidies and a stronger role for carbon pricing, complemented by stricter regulations and additional investments. A “National Policy on Climate Change 2.0” was announced in September 2024 and contains ambitious measures in this direction, which should be implemented without unnecessary delays. Private investment could benefit from a more even playing field between private and government-linked enterprises.