Robust growth in the 1Q2023

Malaysia’s economy grew by 5.6% y/y (4Q2022: 7.1% y/y), above our expectation of 4.8% – 5.0% growth. On a month-on-month seasonally adjusted basis, the economy grew by 0.9% (4Q2022: -1.7%). The strong growth in the number was supported by private consumption which contributes around 60% to the GDP. Exports however, contracted by 3.3% y/y (4Q2022: 8.6% y/y) due to slower demand from the external front considering the expected global headwinds this year. More details on the breakdown in Exhibit 1 and 2.

Domestic demand was the driver

Private expenditure grew robustly by 5.9% y/y (4Q2022: 7.8% y/y), mainly due to few holidays in the 1Q2023, including Chinese New Year in January, and long school holidays in February and March. Both wholesale and retail spending posted gains of 5.5% (4Q2022 5.9%) and 19.5% (4Q2022 23.8%) respectively. Nonetheless, we saw both indicators have been on a downward trend since the 3Q2022, coincidentally after the first interest rate hike in Malaysia.

Apart from these reasons, the inflow of foreign tourists has been improving as well. As illustrated in Exhibit 3, where total international flights have now reached 70% of pre-pandemic levels. Assuming this trajectory persists, tourism related revenue should be supportive of GDP growth for this year.

Exports however grew slower

Exports growth, however, contracted, as a pessimistic outlook from the external front remained. This is despite the reopening of China’s economy since January 2023. Furthermore, we saw exports growth to major trading partners have been trending lower including the US and Singapore, while exports growth to China remained in the negative territory since December 2022, as shown in Exhibit 4.

Agriculture might take some time to recover

The agriculture sector, however, grew by 0.9% (4Q022: 1.1%). The slower growth is mainly due to slower production of oil palm which only increased by 3.4% in the 1Q2022 (4Q2022: 9.6%). The oil palm contributes around 43.7% to this sector. With more foreign workers returning, production is expected to improve sometime in the middle of the year. However, the overall outlook depends on the weather, as El Nino, which has a high probability of happening based on current forecast, could cause production to be lower than expected.

Construction activities are improving

The construction sector grew by 7.4% y/y (4Q2022: 10.1% y/y) led by activities in civil engineering, which improved by 15.9% y/y in the 1Q2023 (4Q2022: 18.1% y/y). Improvement in the employment of this sector can be seen. So far, there is around 1.26 million are employed in this sector, which is around 95% of the prepandemic levels. Most of this shortfall is due to the lack of semi-skilled workers, which is highly dependent on the foreign workforce. Higher input materials could be the downside for the construction sector and putting this into perspective, the cost for cement is still 20% higher than the pre-pandemic levels.

Forward looking indicator: It remains about domestic strength vs. external uncertainty still

We expect domestic demand will continue to be the main driver for growth this year. Salary growth in the services sector, which employs around 62% of the overall labour market, may have peaked. A similar trend can be seen in the manufacturing sector, as shown in Exhibit 7 and 8.

While employment activities have been trending downward, there is still room for the labour market to improve further as the total vacancy in the labour market is still at around 3.6 times higher than the pre-pandemic levels, as shown in Exhibit 9. This indicates that private spending may have peaked but still has room for more improvement.

The tourism and its related sector also have room for further improvement. As data suggests, total inflow international tourist now is 70% of the pre-pandemic level, and at this rate (based on conservative estimate), total inflow may return to the pre-pandemic level by late 2024.

Exports, however, are expected to be slower as the latest manufacturing PMI as of April 2023 is still under the contractionary level, sustaining the subdued momentum observed since September 2022. The outlook on the global front remains dim as the global economies are dealing with the impact from steep interest rate hikes particularly among global central banks and inflations proven to be stickier than initially expected.

For the full year 2023, we still expect Malaysia’s economy to grow at 4.5%, mainly supported by domestic factors including improving labour market, investment realisation, and improvement in the construction and the agriculture sectors.

Source: AmInvest Research - 15 May 2023