Malaysia's export-oriented economy is dependent on global growth, which is facing mounting fears of recession. A weak ringgit currency and a slowdown in China, Malaysia's main trading partner, are also weighing on the economy.
Second-quarter growth came in at 2.9%, central bank data showed. The expansion was the slowest pace since the third quarter of 2021 when the economy contracted by 4.2%, and was lower than the 5.6% growth in the first quarter of the year.
Economists surveyed by Reuters had forecast gross domestic product growth at 3.3% in the April to June period.
Bank Negara Malaysia also said the country's full-year economic expansion will come in at the lower end of the 4% to 5% range it had forecast earlier.
"The weak external demand is expected to weigh on near-term growth. The economy is facing downside risks stemming from weaker-than-expected global growth, and a deeper or longer-than-expected technology downcycle," Governor Abdul Rasheed Ghaffour told a news conference.
Malaysia could also see lower-than-expected commodity production due to the stronger impact from El Nino and prolonged plant maintenance, he said. Malaysia is one of the world's biggest exporters of palm oil and liquefied natural gas.
Improving tourist arrivals and faster implementation of domestic projects could provide some upside, Abdul Rasheed said.
While he does not expect a worldwide recession, the governor said global growth will be below the long-term average.
Other data on Friday showed Malaysia's exports in July slumped 13.1% from a year earlier, much more than economists forecasts for a 11.3% drop. Imports also fell more than expected.Mohd Afzanizam Abdul Rashid at Bank Muamalat Malaysia said the economic and trade data showed how susceptible the economy was to the global slowdown.
Malaysian consumers are also likely to be cautious in their spending going forward, leading to slower economic growth in the second half, he said.
"In that sense, risks that GDP might grow below 4% to 5% projected growth is quite high," Mohd Afzanizam said.
Malaysia is also facing some pressure from the ringgit, which is the worst-performing currency in Southeast Asia this year. BNM has said it would intervene in the foreign exchange markets to stabilize the ringgit, which has dropped over 5% against the U.S. dollar this year.
The central bank last month kept benchmark interest rates unchanged due to moderating growth and easing inflation, with economists saying it will likely stay on hold for the rest of the year.
On Friday, the central bank said while cost pressures have eased, headline and core inflation will moderate further in the second half partly due to a higher comparative base last year.