The global economic outlook for 2025 is clouded by significant downside risks, driven by the resurgence of protectionist trade policies and escalating geopolitical tensions. Unlike during the previous term of the Trump administration, other nations are now better equipped to retaliate, setting the stage for tit-for-tat trade conflicts involving the US, China, and Europe. Proposed 60% tariffs on Chinese goods are expected to further disrupt global trade, prompting Beijing to adopt aggressive fiscal stimulus to bolster domestic demand. While such measures may offer a short-term lift to growth, they risk exacerbating structural vulnerabilities, including a fragile property market and elevated geopolitical tensions. Meanwhile, in the US, inflationary pressures stemming from protectionist and nativist policies are likely to hinder the US Federal Reserve's (US Fed) disinflation efforts, potentially necessitating additional rate hikes that could heighten financial market volatility.

The geopolitical environment remains fragile, with conflicts in the Middle East and elsewhere posing risks to energy supply stability. A sharp rise in oil prices could significantly elevate global inflation, undermining confidence and slowing growth, particularly in oil-importing economies. Rising public debt and populist policies in some countries add to the risks, with persistent fiscal deficits and market scepticism potentially driving bond yields higher, echoing the UK's gilt market crisis of 2022. Financial vulnerabilities also persist, with high debt levels, stretched asset valuations, and deteriorating credit quality, particularly in the commercial property sector. The interconnectedness of non-bank financial institutions amplifies systemic risk, as shocks in one market segment could rapidly propagate across the financial system.

Trade policy uncertainty and the resurgence of protectionism threaten to disrupt global supply chains, inflate production costs, and erode living standards. For emerging markets, adverse growth surprises or deviations from disinflation trajectories could amplify volatility in capital flows and exchange rates. While structural shifts, such as investment-led growth and supply chain realignment, offer some resilience, these factors are outweighed by mounting downside risks. A rebound in consumer confidence or a resolution of geopolitical tensions could provide upside potential, but such outcomes remain highly uncertain, underscoring the precarious state of the 2025 global economic outlook.

US: Kickstart of Trumponomics 2.0 in 2025

Slowing Growth Amid Rising Policy Uncertainties

The US economy is projected to grow at 2.0% YoY in 2025, moderating from 2.8% YoY in 2024E, as escalating trade tensions and restrictive fiscal measures under the Trump administration are expected to weigh on economic activity. This slowdown reflects the cumulative impact of protectionist policies, trade disruptions, and subdued domestic investment.

The administration's post-election fiscal agenda includes significant spending initiatives, which may provide a temporary boost to growth but are likely to exacerbate inflationary pressures. Furthermore, tighter immigration policies, a prominent feature of campaign rhetoric, could constrain labour supply, complicating the outlook for both growth and inflation.

This combination of factors highlights the growing economic risks heading into 2025, with heightened trade uncertainties and policy-related challenges dampening private sector confidence and casting a shadow over the broader growth trajectory.

Inflationary Pressures Expected to Heighten by Trade Policies

Inflation is expected to rise further in 2025, driven by the impact of tariffs and their cascading effects on import costs. The US Fed is projected to implement two 25bps rate cuts, with one in 1H25 and another in 2H25, bringing the federal funds rate to 4.00% (upper bound) by year-end. While these measures aim to address slowing growth, we believe its easing cycle will remain brief due to persistent inflationary pressures stemming from fiscal expansion and trade protectionism.

The administration's aggressive trade policies, including higher tariffs on imports from Mexico, Canada, and China, are expected to heighten inflationary risks, requiring the Fed to proceed with caution. In our view, this balance between easing growth concerns and managing inflation underscores the complexities facing monetary policymakers in the current environment.

Trade Protectionism and Its Ripple Effects on Global Supply Chains

The Trump administration's intensified focus on protectionist trade policies, including a "proposed" 25% tariff on goods from Mexico and Canada and an additional 10% tariff on Chinese imports (as quoted in November 2024), marks a substantial shift in US economic strategy. These measures, aimed at bolstering domestic manufacturing, are expected to disrupt global supply chains, creating inefficiencies for industries dependent on imported components.

In tandem, stricter immigration policies are likely to aggravate labour shortages in key sectors such as agriculture, construction, and manufacturing. This combination of trade and labour market pressures is expected to accelerate wage growth, driving inflationary pressures, while potentially weighing on long-term productivity. Businesses are anticipated to face higher input costs and operational uncertainties as they adapt to these structural shifts, further clouding the near-term economic outlook.

Stronger US Growth Amid Diverging Global Dynamics

We expect US growth to outperform other developed markets in 2025, bolstered by fiscal stimulus measures and deregulation initiatives under the Trump administration. However, this outperformance is likely to have notable external ramifications. The combination of fiscal injections, higher yields, and a stronger US dollar is expected to widen global growth disparities, posing challenges for economies heavily dependent on US trade or external financing. Additionally, the Fed's relatively tight monetary policy could limit the ability of other central banks, particularly in the Eurozone and Japan, to implement aggressive easing measures.

Resilient Labour Market Supporting Domestic Consumption

The US labour market remains a key pillar of economic resilience, driven by strong demand for workers and consistent wage growth. This strength is expected to continue supporting private consumption, which accounts for the largest share of GDP. Although inflationary pressures may erode purchasing power for some households, the overall robustness of the labour market, along with healthy household balance sheets, should help cushion these effects. However, tighter immigration policies under the Trump administration could constrain labour supply, exerting upward pressure on wages and potentially amplifying inflationary trends. In our assessment, while these factors are likely to sustain consumption in the short term, they could create imbalances in the labour market, posing longer-term challenges for growth and productivity.

Limited Fiscal Adjustments and Deregulation Drive Policy Agenda

The Trump administration's fiscal agenda is expected to prioritise the extension of prior tax cuts, alongside modest additional reductions. While these measures are likely to offer short-term relief for businesses, they are unlikely to address the structural fiscal challenges facing the US economy. Efforts to narrow the fiscal deficit are projected to be limited, leaving government debt at persistently high levels. On deregulation, the administration's focus on expanding fossil fuel production and easing environmental regulations is anticipated to benefit the energy and industrial sectors.

Monetary Policy Divergence to Shape Market Dynamics

Divergent monetary policies between the US Fed and other central banks, such as the ECB, are expected to create contrasting global financial conditions. The Fed's gradual rate cuts, contrasted with aggressive monetary easing in the Eurozone, are likely to support USD strength in 1H25. While a stronger USD may benefit US importers by lowering input costs, it poses challenges for exporters reliant on foreign demand.

Such monetary divergence is anticipated to potentially reshape global trade flows, with significant implications for sectors sensitive to exchange rate movements, particularly manufacturing and export-driven industries.

Sectoral Outlook Amid Policy Shifts

The policy framework under the Trump administration is expected to bring substantial shifts to the US economic landscape, with notable sectoral implications. Trade-dependent industries are likely to experience heightened pressures, as tariffs and disruptions to global trade weigh on cost structures and erode competitiveness. In contrast, sectors aligned with fiscal stimulus initiatives, including energy and infrastructure, stand to gain from regulatory support and increased government expenditure.

Nevertheless, inflationary pressures and persistent policy uncertainties are anticipated to create a challenging environment across all industries, underscoring the need for businesses to remain agile and responsive to evolving economic conditions.

Downside Risks Surrounding Trade Tensions and Inflation Shape

The US economic outlook for 2025 is clouded by significant downside risks, driven primarily by escalating trade tensions. The imposition of higher tariffs on Mexico, Canada, and China threatens to disrupt supply chains, elevate input costs, and suppress trade volumes. Retaliatory measures from key trading partners are likely to exacerbate these challenges, weighing on global trade efficiency and dampening investment sentiment.

Inflationary pressures stemming from elevated import costs remain a key concern. While the Federal Reserve's anticipated rate cuts are intended to provide a buffer for economic growth, the limited scope for monetary easing highlights the delicate balancing act between curbing inflation and sustaining economic momentum.

Geopolitical uncertainties, particularly those linked to unilateral trade policies and declining multilateral cooperation, further complicate the outlook. These dynamics risk deepening global economic fragmentation, constraining future trade agreements and amplifying volatility.

In our assessment, these risks highlight the vulnerability of the US economy in 2025, with escalating trade tensions, persistent inflationary pressures, and geopolitical uncertainties posing significant challenges for both businesses and policymakers.

China: Navigating a Fragile Path in the Year of the Snake

Slowing Growth Amid Structural Headwinds

China's GDP growth is projected at approximately 4% YoY in 2025, reflecting a moderation from its pre-pandemic average as the economy contends with structural vulnerabilities and external pressures. The property sector remains a significant drag on growth, burdened by over-leveraged developers and waning housing demand. Policymakers have prioritised systemic stability over aggressive interventions, refraining from large-scale bailouts to avoid moral hazard. While this approach has stabilised financial markets, it has dampened investment in the property sector, traditionally a key economic driver.

Weaker export demand further clouds the outlook, underpinned by a decelerating global economy and persistent US-China trade tensions. The government's push to rebalance growth towards domestic consumption and innovation represents a long-term strategic pivot but is insufficient to fully counteract near-term cyclical pressures. As a result, China's growth trajectory remains constrained, highlighting the need for sustained structural reforms to address these headwinds.

Fiscal Prudence and Measured Policy Easing

China's policy approach in 2025 is expected to prioritise targeted interventions over broad-based stimulus. The People's Bank of China (PBoC) is likely to maintain an accommodative stance, ensuring sufficient liquidity for strategic sectors such as manufacturing and green technology. However, significant rate cuts appear unlikely, given concerns over inflationary pressures and the risk of capital outflows.

Fiscal policy is set to focus on infrastructure investments and measures aimed at reducing income inequality, including rural development initiatives and tax relief for lower-income households. However, the fiscal capacity for expansive support is constrained by weaker local government revenues, driven by declining land sales and persistent property market challenges. Consequently, policy support is expected to remain concentrated in high-priority areas, with the broader economic recovery hinging on structural reforms and enhanced private sector engagement. While these measures demonstrate the government's commitment to long-term sustainability, they underscore the limited flexibility in addressing near-term cyclical pressures.

Domestic Consumption as a Pillar of Stability

Domestic consumption is poised to play a pivotal role in supporting China's economic stability in 2025, reflecting the government's strategic shift towards rebalancing growth drivers. Household spending, particularly in services such as tourism, healthcare, and retail, is expected to benefit from policy initiatives aimed at boosting disposable incomes and strengthening social safety nets. Efforts to accelerate urbanisation and raise rural incomes through subsidies and targeted investments are also likely to underpin domestic demand.

However, consumer confidence remains subdued, weighed down by uncertainties in the property sector and slower wage growth in specific industries. These headwinds could limit the pace of recovery, with retail sales growth unlikely to reach pre-pandemic levels in the near term. Nonetheless, the structural rise of e-commerce and the expansion of the middle-income demographic provide a longer-term tailwind, positioning domestic consumption as a key pillar of economic resilience.

China's Property Sector Remains a Key Risk

China's property sector continues to present substantial risks to the economic recovery, serving as both a structural and cyclical drag. Weak demand for residential properties, coupled with the financial vulnerabilities of major developers, has extended the sector's downturn. Policymakers have refrained from large-scale bailouts, instead implementing targeted measures such as easing mortgage restrictions and promoting developer consolidations. While these interventions have provided some stability, they have yet to restore broader market confidence.

Local governments, which depend heavily on land sales for revenue, are facing escalating fiscal pressures as the property market slump persists. This strain risks curtailing public investment, further complicating recovery efforts. Without structural reforms to diversify revenue streams and enhance land-use efficiency, the sector's recovery trajectory remains fragile, posing broader risks to China's economic growth outlook.

Geopolitical and Trade Challenges Persist

China's external environment remains challenging, with escalating geopolitical tensions and trade restrictions clouding the economic outlook. The imposition of US curbs on advanced technologies, particularly semiconductors, underscores the deepening economic decoupling between the world's two largest economies. These measures pose significant risks to China's ambitions in high-tech manufacturing and innovation, compelling policymakers to intensify efforts toward technological self-sufficiency. Additionally, China's limited access to advanced technologies under US restrictions is likely to have ripple effects on Malaysia's semiconductor industry, given the interdependence within global supply chains.

Meanwhile, the global push for supply chain diversification, as firms reduce reliance on Chinese manufacturing, is likely to weigh on export performance and FDI inflows. This shift highlights the need for China to strengthen trade ties with emerging markets and bolster domestic industries to mitigate external vulnerabilities. However, the path to achieving self-sufficiency and diversifying trade dependencies is inherently protracted, leaving China exposed to short-term external shocks.

Downside Risks Weigh on Recovery Prospects

China's economic outlook for 2025 is skewed to the downside, shaped by persistent structural vulnerabilities and external pressures. The fragility of the property sector, compounded by subdued global trade, is likely to act as a drag on growth, limiting the efficacy of fiscal and monetary policy interventions. Externally, rising protectionism and escalating geopolitical tensions, particularly with the US, are expected to constrain access to advanced technology markets.

Malaysia: Domestic Resilience Amid Global Challenges

Sustained GDP Growth Underpinned by Robust Domestic Demand

Malaysia's GDP is forecast to grow by 4.9% YoY in 2025, easing from 5.3% YoY in 2024. This reflects a balance of robust domestic demand and strategic policy initiatives, offset by external headwinds such as prolonged US-China trade tensions and softening global semiconductor demand, which could weigh on export-oriented industries, like electronics, a critical contributor to the trade surplus. Private consumption is anticipated to remain the primary growth driver, with household spending projected to rise by 5.7% YoY. This resilience is underpinned by measures in Budget 2025, including RM13bn in cash transfers (up from RM10.7bn in 2024E), civil service salary adjustments, and targeted tax incentives aimed at enhancing disposable incomes.

Investment activity is set to underpin growth momentum, with gross fixed capital formation projected to rise by 10.1% YoY. Strong FDI inflows into sectors such as renewable energy, data centres, and high-value manufacturing are expected to drive this expansion. The Johor-Singapore Special Economic Zone (JS-SEZ), a flagship initiative, is positioned to enhance Malaysia's role as a regional hub for logistics, green technology, and semiconductor production. However, global trade moderation and geopolitical uncertainties could weigh on overall growth, highlighting the need for structural reforms and strengthened regional cooperation to build economic resilience.

Risks to the outlook remain. Externally, protracted US-China trade tensions and subdued global semiconductor demand could constrain export performance, particularly in electronics and high-tech manufacturing. Domestically, the rationalisation of RON95 petrol subsidies poses challenges.

Government Frameworks and Initiatives: Building Economic Resilience

The Malaysian government has introduced a comprehensive framework designed to foster sustainable and inclusive growth, with a clear focus on strategic regional partnerships and global megatrends. The Johor-Singapore Special Economic Zone (JS-SEZ), developed in collaboration with Singapore, exemplifies Malaysia's commitment to deepening regional economic integration and attracting high-value investments in sectors such as electric vehicles (EVs), renewable energy, and digital infrastructure. This initiative is bolstered by the National Investment Incentives Framework (NIIF), which seeks to align investment priorities with emerging global trends.

Since mid-2023, the government has unveiled several critical policy initiatives and legislative measures to drive its growth agenda. Key developments include the MADANI Economy Framework, the National Energy Transition Roadmap (NETR), the New Industrial Master Plan 2030 (NIMP2030), the Mid-Term Review of the 12th Malaysia Plan (12MP MTR), and the Public Finance and Fiscal Responsibility Act (FRA). Further progress includes the launch of the National Semiconductor Strategy (NSS). Attention is now turning towards the 13th Malaysia Plan (13MP), which will encompass the critical period from 2026 to 2030, when key targets under the MADANI Economy Framework are expected to see significant advancements, ensuring alignment with Malaysia's broader developmental goals.

Inflation and RON95 Petrol Subsidy Rationalisation

Headline inflation in 2025 is projected to remain relatively contained at 3% YoY, supported by subdued global commodity prices and stable domestic supply dynamics. However, the planned rationalisation of RON95 petrol subsidies in mid-2025 introduces upside risks to inflation and presents execution challenges. The recalibration of subsidies, based on household income tiers, aims to enhance fiscal sustainability while promoting equitable benefit distribution.

Uncertainties remain, given the lack of clarity on key details such as subsidy quantum, eligibility criteria, and implementation mechanisms. Any delays in addressing these gaps could weigh on public sentiment and market confidence, particularly if higher transportation costs drive broader inflationary pressures. Targeted cash transfer programmes and other support measures are expected to mitigate the impact on lower-income households. The initiative's effectiveness, however, hinges on transparent communication and efficient roll-out to minimise disruptions to household spending behaviour.

Monetary Policy Outlook: Balancing Growth and Inflation

Amid persistent external downside risks, BNM is expected to maintain a cautious stance into 2025, likely keeping the OPR unchanged at 3.00% for the year. This stable policy environment aligns with Malaysia's moderate inflation trajectory and the need to support private investment, which is projected to expand by 9.8% YoY. A steady OPR could also help to partially narrow the negative interest rate differential with US rates.

Following Donald Trump's presidential election victory, US economic policy in 2025 is anticipated to focus on tariffs and tax adjustments. Consequently, we foresee fewer Fed rate cuts in 2025 (as mentioned above), with the timing of policy adjustments dependent on the implementation of new tariff measures, adding uncertainty to the global monetary landscape. While our baseline expectation points to no changes in BNM's policy stance, risks of a 25bps rate hike could possibly emerge if GDP growth significantly outpaces expectations, triggering demand-driven inflationary pressures. Elevated fiscal spending or investment activity could further heighten overheating risks, potentially prompting a reassessment of the current monetary policy stance.

Ringgit: Navigating External Pressures Amid Domestic Resilience

The ringgit is anticipated to remain under pressure in 2025, driven by global monetary policy divergence and ongoing geopolitical uncertainties favouring the US dollar (USD). The USD's strength, supported by a relatively hawkish Federal Reserve stance and elevated safe-haven flows, is expected to weigh on Malaysia's trade and investment outlook. Higher import costs, particularly for intermediate goods, are likely to erode manufacturing competitiveness and compress margins within export-reliant industries.

The ringgit's vulnerability to external shocks remains significant. Potential tariff measures under a Trump administration could place broad downward pressure on Asian currencies. With the ringgit's strong correlation to the Chinese renminbi (RMB), any depreciation in RMB, stemming from US-China trade tensions or weaker Chinese growth, is likely to amplify downside risks. Against this backdrop, the ringgit may face persistent headwinds but could see a gradual appreciation as global uncertainties diminish, and domestic policies gain traction. Overall, the USD/MYR is projected to trade within a range of 4.45-4.55 by year-end.

Source: PublicInvest Research - 3 Jan 2025