PETALING JAYA: With business sentiment in Malaysia weakening for three consecutive quarters, economists warn of slower hiring, delay in investment decisions, and stagnant wage growth ahead.
UOB senior economist Julia Goh said the downbeat trend points to a more cautious outlook, reflecting lingering uncertainties surrounding global trade dynamics and tariff risks, while domestic policy reforms – though necessary for long-term structural improvements – are contributing to near-term hesitancy in investment decisions.
“Economic conditions and business sentiment in the first half of the year (1H25) were buoyed by a temporary pause in tariff actions, front-loaded activity and resilient domestic demand. These factors supported growth and corporate performance during the period.
“Looking ahead, the softening in business sentiment signals a more guarded stance among Malaysian businesses,” she told StarBiz.
Goh added that the cautious outlook may lead to more restrained capital expenditure and hiring plans in the coming quarters, potentially tempering the pace of economic expansion.
Business sentiment saw further softening in the third quarter of 2025 (3Q25), according to the Statistics Department’s business tendency survey (BTS), logging a positive condition indicator of only 0.1%, compared with 2% and 3.2% in 2Q25 and 1Q25, respectively.
More than two-thirds of the respondents in the survey expect gross revenue to drop or stagnate in 3Q25.
OCBC senior Asean economist Lavanya Venkateswaran said it is hard to extrapolate implications for the labour market based on the BTS alone.
That said, the “number of employees” subcomponent in the survey suggests that the employee count across most sectors will likely remain the same, with fewer sectors expecting an increase compared with the previous quarter.
“This suggests that there could be some softness when it comes to new hiring in 3Q25,” she opined.
About 10% of BTS respondents expect to reduce their personnel in 3Q25, up from 7.1% in the previous quarter and slightly higher than 9.7% in 1Q25.
Meanwhile, 76% of businesses expect to retain their staff throughout 3Q25, while 14% anticipate hiring more – down from 16.2% in 2Q25 and 21.1% in 1Q25.
While the relationship between the BTS and real gross domestic product (GDP) growth is not clear-cut, Lavanya said given the various risks to growth, the decline in the BTS reading is broadly consistent with her view of a growth slowdown in 2H25.
“The easing in the BTS underscores some caution on the part of businesses dealing with US tariff-related uncertainties and higher domestic cost pressures from the expansion of sales and service tax, higher utility tariffs and a planned tiered foreign worker levy in 2026,” she said.
A slower pace of expansion in 2H25 is also projected, considering external uncertainties as well as a host of domestic tax and labour policy changes, which Lavanya said are likely to have a bigger impact on small and medium enterprises than multinational corporations.
This is despite a still-strong investment pipeline, underscored by foreign and domestic investment commitments, along with data centre construction timelines.
Economist Geoffrey Williams said wages remain generally stagnant, emphasising that this is a structural issue rather than a cyclical one.
However, he added that the prevailing negative business sentiment could be used to “hold wages down again”.
Median data from the Statistics Department revealed that as of March, 50% of Malaysians in the formal sector are earning less than RM3000 a month.
Nevertheless, Williams opined that Malaysia’s GDP target of 4% to 4.8% for the year is achievable, particularly as it had already been revised downward from the previous 4.5% to 5.5% range.
“It is a more realistic target and likely to be achieved, probably at the lower end of 4% to 4.5%, ” he said.
The pivot in business sentiment, according to iFAST Capital research analyst Kevin Khaw Khai Shen, will likely occur in 4Q25 or early 1Q26.
This expected turnaround is driven by gradual improvements in business confidence as uncertainties surrounding the US tariff situation ease, and clarity on domestic policy measures – such as subsidy rationalisation and government policy frameworks – begins to take hold.
“Businesses usually need one or two quarters to recover from the weaker sentiment in the earlier quarters. From a business planning perspective, companies also require more time to make long-term plans and decisions,” he said.
Khaw said that while he expects slightly slower hiring and wage stagnation in 3Q25 and 4Q25, layoffs are not anticipated.
“Although our unemployment rate has always been very steady, it is not a very good reflection of the real job market.
“For the real job market, businesses and corporates remain relatively cautious under the current outlook,” he said, adding that new job seekers may feel the impact more in 3Q25 and 4Q25.
To a certain extent, the overnight policy rate – now at a 29-month low following a 25-basis-point cut in July to 2.75% – can help cushion the higher cost of living by boosting business investment and consumer spending through lower borrowing costs.
Sunway University economics professor Dr Yeah Kim Leng said the lowered interest rate will help shore up overall business and consumer sentiment, especially when accompanied by increased lending activity.
On this note, Williams, pointed out that lower interest rates will help accommodate growth – not push it.
Commenting on the softening business sentiment, Yeah noted that the decline is gradual and is turning less positive rather than more negative, indicating that the economy is expected to post positive growth for the year following a 4.4% year-on-year growth in 1H25.
“The decline in business sentiment does not necessarily translate into job or salary cuts, as revenue and profit performance varies across industries depending on severity of slowdown impact,” he said.
However, he noted that hiring and salary growth are expected to ease in sectors facing weakening demand, and could contract or decline in sectors experiencing job cuts and cost-cutting measures.
“The current low unemployment level, coupled with a strong approved investment pipeline, may help cushion the potential job losses and salary cuts in sectors facing a slowdown in business activities,” he said.
On investments, Yeah said the near-stagnant business confidence levels in 3Q25 suggest that 2Q25’s 11.8% expansion in private investment over the previous year’s quarter will likely ease to single digit in 2H25, as employers and investors adopt a more cautious “wait-and-see” approach amid the uncertain economic and business outlook.
“Nonetheless, investment decisions typically consider the growth prospects over the medium term, that is, ‘through-the-cycle’ approach rather than near-term expectations.
“This is especially true for large-scale, capital intensive projects such as semiconductors, automotive, data centres and green energy projects,” he said.
Looking ahead, Goh said key indicators to watch include trade flows, policy clarity – particularly regarding the next round of US tariff actions – and the progress of domestic fiscal and structural reforms, as well as corporate earnings guidance.
To this end, Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said macroeconomic policies are well-positioned to withstand potential shocks and fiscal policies are still expansionary, which will help support aggregate demand.
“Similarly, monetary policies are highly accommodative and the central bank has the policy space to prescribe further monetary easing should downside risks materialise,” he said.
