Chapter 2: Policy and Outlook in 2025

Potential output is the highest non-inflationary level of output that can be produced in an economy, based on prevailing factors of production (i.e. labour and capital) and productivity.

In 2024, potential output⁵ expanded by 4.1% (2023: 3.9%; 2011–19 average: 4.9%). The expansion was driven by higher capital accumulation in line with robust investment activity (2024: 12%; 2023: 5.5%). Total factor productivity (TFP) growth was also higher as firms’ increased capital investments helped raise technological efficiency and resource utilisation. Labour utilisation improved with the unemployment rate declining to below pre-pandemic level while labour force participation rate increased to 70.5% (2023: 70%). The output gap turned positive in 2024 at 0.4% (2023: -0.6%)⁶ as the level of actual output was higher relative to the potential output.

Going forward, the output gap is expected to remain positive in 2025. While the potential output is projected to grow at its pre-pandemic levels of 4%–5%, the actual output growth could grow at a faster pace of 4.5%–5.5%, driven by sustained strength in domestic demand. Over the medium term, potential output will remain supported by higher investments and improvements in productivity amid the continued implementation of multi-year investment projects, as well as national masterplans such as New Industrial Master Plan 2030 (NIMP 2030), National Semiconductor Strategy (NSS), National Energy Transition Roadmap (NETR), and the upcoming 13th Malaysia Plan (RMK-13).