OVERVIEW

Malaysia’s recovery momentum continued with favourable expansion in domestic demand, sustained improvement in employment and income conditions as well as policy support, contributing to a gross domestic product (GDP) growth of +3.3% YoY in 3Q23 (2Q23: +2.9%), which was higher than market expectation of 3.0%. Albeit higher than 2Q23’s growth, Bank Negara Malaysia (BNM) highlighted several factors that weighed on 3Q23 growth, notably weaker external demand impacting goods production and exports as well as weaker mining production.

Additionally, we are of the view that escalating geopolitical tensions, inflationary pressures, and tightening financial market conditions exerted further strain. Despite these formidable external challenges posing increased downside risks to the domestic economy, their impact is partially mitigated by the anticipated strength in domestic activity, supported by ongoing recovery in the labour market and the realisation of multi-year investment projects.

Going into 2024, amid a challenging global context, BNM anticipates the Malaysian economy to expand between 4% and 5%. The initiatives outlined in Budget 2024 are poised to offer further momentum to economic activity. However, the growth prospects are susceptible to downside risks, primarily associated with weaker-than-expected external demand and potential prolonged decreases in commodity production.

Demand-side growth was supported by both the private and public sector. Private consumption grew by 4.6% YoY in 3Q23 (4.3% in 2Q23), while private investments remained positive at 4.5% YoY in 3Q23, as compared to 5.1% in 2Q23. In 3Q23, import growth declined by 11.1%, while export growth contracted by 12% in 3Q23. Net exports declined significantly to -22.7% YoY in 3Q23, from -3.7% in 2Q23.

Supply-side growth continued to be driven by services (3Q23: +5.0% YoY, 2Q23: +4.7%). Similarly, the construction sector (3Q23: +7.2% YoY, 2Q23: +6.2%) and agriculture sector (3Q23: +0.8% YoY, 2Q23: -1.0%) rose further. However, both the manufacturing and mining sectors experienced a downturn, with negative YoY growth at -0.1% in 3Q23.

On a QoQ and seasonally adjusted basis, Malaysia’s GDP recorded an increased growth of 2.6% in 3Q23, as compared to +1.5% in 2Q23. Private consumption growth contracted at -0.7% QoQ in 3Q23, while public consumption growth rose to +4.6% QoQ. The Business Condition Index (BCI) continued to linger below the 100-point threshold level in 2Q23, reflecting continuous uncertainty moving forward. The Consumer Sentiment Index (CSI) also sustained below the 100-point level at 90.8 in 2Q23. Moreover, according to the Department of Statistics (DOSM), on a monthly basis, the country’s real GDP expanded by 4.2% YoY in July, followed by 3.2% in August and 2.5% in September.

SUPPLY SIDE ANALYSIS

The Services sector, which accounted for 59.1% of GDP in 3Q23, recorded a higher growth of +5.0% YoY (2Q23: +4.7%). The favourable growth performance was attributed to a moderation in consumer- and businessrelated services. The additional support from policy assistance, as well as improved labour market, coupled with continued recovery in tourism provided support to the sector.

Similarly, construction activity rose further by 7.2% YoY in 3Q23 (6.2% in 2Q23), with most subsectors recording positive growth in activities. BNM noted that the expansion was firmly supported by continued progress of large infrastructure projects and small-scale projects.

Additionally, growth in the agriculture sector improved and rose by 0.8% YoY in 3Q23, from -1% in 2Q23, driven by higher oil palm output as weather conditions improved amid easing labour shortages.

Manufacturing output (3Q23: -0.1% YoY, 2Q23: +0.1%) was dragged down by further weakness in E&E amid tech down cycle and lower production of refined petroleum products. The E&E cluster contracted by 2.5% YoY in 3Q23, from -1.5% in 2Q23. Nevertheless, transport equipment, other manufacturing & repair and non-metallic mineral products, basic metal & fabricated metal products continuously increased in 3Q23, with 4.5% and 5.5%, respectively, driven by domestic demand.

The mining sector also remained negative at -0.1% YoY in 3Q23 (-2.3% in 2Q23), weighed down by continued contraction in natural gas production.

DEMAND SIDE ANALYSIS

The growth in private expenditure sustained positive growth amid improving labour market conditions as well as higher employment, continued expansion in wages and policy measures. Total consumption grew at a higher pace by 4.8% YoY in 3Q23 (4.2% in 2Q23), while growth in total investment rose modestly by 5.1% YoY in 3Q23 (5.5% in 2Q23), as capital spending by both private and public sectors remained positive.

Growth in private consumption rose positively at 4.6% YoY in 3Q23 (4.3% in 2Q23), supported by improvement in both spending on necessities and discretionary by households, particularly for transport, food & non-alcoholic beverages and housing, water, electricity, gas & other fuels. Furthermore, policy initiatives such as the continued welfare assistance programme, as well as ongoing consumption subsidies on selected goods and services also supported growth in private consumption, while minimising the impact of rising cost of living. Growth in public consumption rose further to +5.8% YoY in 3Q23 (+3.8% in 2Q23), due to higher supplies and services spending by the Government.

Growth in public investment rose at a slower pace of 7.5% YoY in 3Q23 (7.9% in 2Q23), driven by continued expansion of Government fixed assets spending and capital expenditure. We believe that as the Government continues to prioritise investments with high multiplier impact to the economy, development expenditure will continue to be channelled mainly toward projects which promote sustainable development, raise people’s standard of living, accelerate technology adoption and innovation as well as improve transport infrastructure, aligned with the Twelfth Malaysia Plan (12MP)’s objectives. Similarly, growth in private investment sustained at 4.5% YoY in 3Q23, as compared to 5.1% in 2Q23, supported by continued capacity expansion by businesses. Moving forward, we anticipate that the continuation of transportation-related projects, such as the CDR, East Coast Rail Link (ECRL), and Rapid Transit System Link, along with an accelerated effort to renovate dilapidated schools and clinics in rural areas, will drive the momentum of public investment growth.

On the external front, growth in Malaysia’s real exports of goods and services plummeted further to -12.0% YoY in 3Q23 (-9.4% in 2Q23), influenced by the contraction in exports of goods. Growth in real imports of goods and services also declined further by 11.1% YoY in 3Q23 (-9.7% in 2Q23) due to lethargic performance in the import of goods.

MONETARY OUTLOOK

On the inflation front, there has been a sustained decrease in headline inflation, declining to 2.0% in 3Q23 from 2.8% in 2Q23, primarily attributed to more moderate cost conditions. This decline was observed in both non-core and core inflation. Factors contributing to the moderation in non-core inflation include fresh food and fuel. Core inflation also decreased to 2.5% in 3Q23, down from 3.4% in 2Q23, yet it remains above its long-term average (averaging 2% between 2011 and 2019). BNM indicated that this trend is likely to persist for the remainder of 2023, with headline inflation projected to average between 2.5% and 3% for the year.

Moving into 2024, BNM projects that headline and core inflation will likely sustain a modest trend, barring any significant cost shocks. However, potential risks to the inflation outlook hinge significantly on alterations to domestic policies concerning subsidies and price controls, as well as fluctuations in global commodity prices and financial market dynamics. Notably, the Government's plans to reassess price controls and subsidies in 2024 will impact both inflation and demand conditions. However, the precise timeline and comprehensive details concerning the effective date and implementation of these Budget 2024 measures remain pending. As highlighted in the tabling of Budget 2024, MOF foresees inflation to sustain its manageability, fluctuating between 2.1% and 3.6% in 2024. Furthermore, we also believe that the domestic inflation outlook is subject to various other determinants that necessitate vigilant scrutiny in the short term. These encompass the increased cash aids, regional trade restrictions, ongoing geopolitical tensions, and the expectation of prolonged higher global interest rates, which may perpetuate currency depreciation amid tighter global financial conditions.

Given the adjustment of the Overnight Policy Rate (OPR) to pre-pandemic levels, we believe that the OPR will hold steady at 3.00% until at least the 2Q24. BNM has underscored that the existing OPR level aligns with a supportive monetary policy stance for the economy, in line with the current evaluation of inflation and growth prospects.

OVERALL OUTLOOK

Looking ahead, given the intricate global milieu, forecasts are for the domestic economy to grow by approximately 4% in 2023 and between 4% and 5% in 2024. The anticipated growth trajectory is expected to rely on sustained domestic demand, driven by improving employment and income conditions, especially in sectors oriented toward the domestic market. Governor Datuk Abdul Rasheed Ghaffour noted that this growth performance along with other favourable economic developments would provide support to the ringgit. Improvements in tourist arrivals and spending are expected to continue. Malaysia is projected to exceed its initial 2023 target of 16.1 million international tourist arrivals, with expectations now reaching 18 million, supported by the recent announcement by Tourism, Arts, and Culture Minister Datuk Seri Tiong King Sing regarding the imminent introduction of a visa-free travel policy for Chinese tourists. Furthermore, investment will receive backing from ongoing multi-year infrastructure projects and strategic initiatives outlined in Budget 2024, collectively driving economic activity forward.

Our current outlook for the full-year 2023 GDP stands at 4.0%, with an anticipated increase to 4.5% next year. However, BNM has highlighted that the growth prospects are vulnerable to downside risks primarily linked to weaker external demand and potential prolonged declines in commodity production. Projections also suggest a slower global economic growth trajectory in 2024, with the effects of tight monetary policies expected to intensify in the coming quarters before gradually easing in the latter 2H24. Given Malaysia's significant integration with the global economy and financial markets, the nation is also exposed to considerable risks stemming from a prolonged real estate slowdown in China, especially as the postpandemic rebound in China recedes more swiftly than expected.

Nonetheless, potential upside risks include stronger-than-expected tourism activity, a robust recovery from the E&E sector downturn, and accelerated implementation of both existing and new investment projects, with global trade projected to rise to 3.7% in 2024, up from 2% in 2023.

Source: PublicInvest Research - 20 Nov 2023