Tariff pause to provide breather
Despite the de-escalation of the tariff war between the United States and China, uncertainties still linger in the economy as negotiations continue to take place during the 90-day pause.
Yesterday, there was a significant easing of trade tensions between the United States and China when the countries agreed to suspend most tariffs on each other’s goods for 90 days, reducing reciprocal tariffs between both nations to 10% from 125%.
The United States, however, will maintain its 20% duties on Chinese imports relating to fentanyl, keeping total tariffs on China at 30%.
This much-awaited move signals an aversion from a full-scale trade war, offering a welcome relief to global economies.
Nonetheless, Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said there is a high likelihood that the 10% baseline levy will remain in place for every country after the 90-day period.
“Hence, while the tariff has been reduced to 10% for all, including China, a 10% tariff is still different from having zero tariffs as before. Growth as a result may be tilted slightly downward. However, the possibility of a recession will be substantially reduced,” he told StarBiz.
Wong added the easing of tariffs between the two economic powerhouses will uplift business sentiment, with markets expected to feel more optimistic over the 90-day period, as earlier pessimistic dynamics are likely to dissipate.
On the other hand, Sunway University economics professor Yeah Kim Leng said while uncertainties still reign over the continuing negotiations during the 90-day tariff suspension, the thaw has reduced substantially a major headwind to global growth outlook.
This portends partial reversal of the projected decline of global trade and investment flows in the second half of 2025 (2H25) amid expectations of more positive financial market reactions and improved growth prospects of the US and Chinese economies.
“Given the easing of downside risk of the US tariff impact on global trade in 2H25, the full-year gross domestic product (GDP) growth forecast for Malaysia is expected to nudge up to the upper end of the forecast range.
“With first-quarter (1Q) GDP anticipated at 4.5%, the likelihood of full-year growth surpassing the International Monetary Fund’s (IMF) forecast of 4.1% has increased significantly,” he said.
The good news from the US-China breakthrough is that it will ease the negotiation path for the other countries, with the 10% baseline tariff remaining as the minimum threshold, Yeah added.
“In short, the red alert on global economic outlook has now shifted to amber (yellow) with the tariff de-escalation,” he said.
Yeah is of the view that the bulk of GDP increase in 1Q25 will be contributed by domestic demand, largely by private consumption, private investment and government spending.
“Malaysia’s growth prospects in 2025 remain well supported by resilient domestic demand, strong pipeline of domestic and foreign direct investment projects, a well-capitalised and liquid banking and financial system and ongoing structural reforms to accelerate industrial upgrading, enhance economic efficiency and raise wage and productivity levels,” he said.
Acceleration in exports from front-loading activities, as companies take advantage of the 90-day suspension to rush shipments before the tariffs take effect, was largely expected to boost 1Q’s GDP growth.
Economists are divided on the magnitude and timing of the effects from front-loading activities.
Economist Geoffrey Williams said 1Q25 GDP is likely to register a good performance due to the ramp-up in trade ahead of the US tariff announcement.
“Exports were strong in 4Q last year (4Q24) and will likely remain strong in 1Q25 and in 2Q25 because of the 90-day pause in tariff implementation. Tourism also appears to be resilient and the forecast is for higher tourism activity in 2025,” he said.
Underpinned by the de-escalation of the trade dispute between the US and China, Williams said the earlier downgrades in economic forecasts by international agencies and various research houses will have to be revised upwards, back to near the levels expected at the start of the year.
Last month, the IMF downgraded its real GDP growth forecast for Malaysia to 4.1% this year, from its January estimate of 4.7%. Moody’s Analytics also lowered its forecast for domestic 2025 GDP growth to 4.4% from 5%.
OCBC senior Asean economist Lavanya Venkateswaran said the house view on Malaysia’s economic growth forecasts remains unchanged amidst the new tariff outcomes. She noted that it will be important to see how reciprocal tariff rates are adjusted for Malaysia.
Lavanya expects the final estimate of 1Q25 GDP to be the same as the Statistics Department’s advance estimate of 4.4% year-on-year (y-o-y). The 4.4% figure is a moderation from the 5% y-o-y expansion recorded in 4Q24.
She said while this reflects slower growth compared with 4Q24, household and investment spending data will be important to gauge the health of domestic demand drivers. Moreover, front-loading activities to the United States are expected to support trade and current account surplus, ahead of the implementation of reciprocal and potential sector specific semiconductor tariffs.
“However, as the impact of front-loading fades with the confirmation of tariffs (when they do come), the drop in export growth and its impact on the trade and current account surpluses could become more pronounced.
“The current account surplus is likely to come in narrower than our base case of 1.7% of GDP for 2025, though there are numerous uncertainties associated with the trajectory of exports this year,” she said.
Sunway University economics professor Dr Yeah Kim Leng said the fact that local exports grew more slowly in 1Q25 suggests there was no major surge in exports, particularly to the US, in anticipation of higher tariffs.
In 1Q25, exports grew 4.4% y-o-y to RM378.36bil, down from a 7.3% y-o-y increase in 4Q24 to RM392.97bil.
Yeah said given that March’s industrial production index (IPI), especially manufacturing IPI, was slightly stronger than expected, the statistics department’s advance 1Q25 GDP estimate of 4.4% may be revised up slightly to 4.5%. This, however, is still weaker than 2024’s growth.
“While the effects of Trump’s tariffs will only be felt in 2Q25, the expected slower GDP growth in 1Q25 after a robust 5.1% rise in 2024 is within expectations, given the weaker global economy expected this year following Trump’s unprecedented global tariff hikes on April 2,” he said.
Meanwhile, Centre for Market Education (CME) chief executive officer Dr Carmelo Ferlito pointed out that growth in GDP per se is not necessarily a positive thing and is dependent on the underlying components and how that growth is achieved.
“The issue is not GDP growth but which components are pushing GDP up and how. For example, if, ceteris paribus, GDP grows thanks to increased public spending financed by debt, this will create inflation and unemployment. Hence, while there is growth, it is not good for the economy.
“The pillars for sustainable growth are investments and savings. In the current scenario, the main risk ahead is the decline of the investment pace, which was extremely positive in the past year,” he said.
Last week, Bank Negara held the overnight policy rate (OPR) steady at 3%, unchanged since May 2023. In a surprise move, the central bank also cut the statutory reserve requirement (SRR) by 100 basis points to 1%, a move that is expected to inject RM19bil in liquidity into the banking system.
While BNM said the SRR reduction does not signal a shift in monetary policy, some experts pointed out that SRR cuts have frequently preceded OPR reductions or have at least occurred alongside cuts in OPR.
Universiti Tunku Abdul Rahman’s Wong said the latest easing of US-China tensions would mean it is more likely that OPR will be maintained in July, with a potential rate cut likely to take place in September.
He now anticipates a smaller downward revision in GDP growth, trimming earlier estimates from 1 to 1.5 percentage points (ppt) to a more moderate range of 0.5 to 1 ppt at most.
“At this juncture, the central bank is likely to wait for more data from April to June before making a move.
“The 24% country-specific tariff on Malaysia is more likely to be abolished now, provided certain conditions are met—such as the country fulfilling specific demands or commitments. If we are able to offer better promises in our negotiations with the US, I am optimistic that the 24% tariff rate will be removed,” Wong said.
Williams does not see the need for interest rate cuts, all the more now that growth is less likely to slow as much as previously feared, with the overall growth rate for the year expected to remain strong.
He said Bank Negara’s mandate is to support stable prices, sustainable growth and a strong financial system. All of these are in good shape and do not put pressure on rate cuts.
“The decision to hold rates at 3% is in-line with the view that growth will be strong and not in need of help from lower interest rates.
“The tone from Bank Negara remains the same, that the domestic economic conditions are strong but there are uncertainties in the global environment outside of the control of Malaysian policymakers, but which can be improved by positive negotiations on tariffs which are well underway,” Williams said.
He noted that the trade agreement between the US and China came quicker than expected, despite being one of the most difficult to achieve from a geopolitical perspective, with progress made despite the challenges.
“We have also seen the US-UK trade agreement. All this shows the real possibility of a wide reduction in tariff and non-tariff barriers across all the countries currently involved in negotiations with the US. We expect to see more positive deals soon,” he said.
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