In 2024, the trajectory of global economic growth appears poised for continuity, albeit against a backdrop of persistent challenges. While the headwinds of tight monetary policies and the gradual withdrawal of fiscal support persist, they are expected to find some cushioning from countervailing factors such as moderating inflation, resilient labour markets, and a resurgence in global trade activity.

Within advanced economies, signs of a moderation in economic activity are discernible despite the resilience exhibited by domestic demand in 2023. The gradual easing of tight labour markets and the depletion of excess savings suggest an impending softening of domestic demand, particularly in the initial months of 2024, as the lagged effects of monetary policy tightening manifest. However, a gradual amelioration is anticipated in the latter half of the year, as the diminishing impact of these monetary policy adjustments takes hold.

Across most regional economies, a buoyant growth outlook for 2024 is anticipated, buoyed by a resurgence in global trade dynamics. Moreover, the constraints on domestic demand are expected to be less stringent compared to major advanced economies, owing to comparatively lesser degrees of monetary tightening and inflationary pressures. However, China's growth trajectory in 2024 is forecasted to exhibit softening tendencies, primarily due to persistent drag from the property market, which dampens consumer sentiments and expenditure. Despite this, China's growth prospects will benefit from the global trade rebound, emerging growth sectors, and supportive fiscal and monetary policies, including substantial government bond issuances.

A notable resurgence in global trade growth is projected for 2024, driven by several factors including the global technology upcycle, recovery in tourism activities, and a favourable base effect from the preceding year. The anticipated technology upcycle is expected to be underpinned by the replacement cycle of consumer electronics and inventory restocking efforts by firms. Structural drivers such as increasing demand for electric vehicles, industrial automation, and the integration of artificial intelligence across consumer and industrial sectors are poised to further bolster this upswing. Notably, the World Semiconductor Trade Statistics forecasts a robust growth in global semiconductor sales, indicating sustained demand momentum. Concurrently, the recovery in global tourism, although gradual in the Asia Pacific region, is expected to regain pre-pandemic levels by 2024, driven by expanding flight capacities, pent-up travel demand, and enhanced tourism resilience in Asia. However, persistent challenges including trade restrictions, shifting consumer spending patterns, and maritime disruptions are likely to temper the pace of global trade growth, keeping it below its long-term average.

Global inflation is anticipated to sustain its moderating trend throughout 2024, largely driven by disinflation in advanced economies and below-average inflationary trends in select emerging markets. This phenomenon is expected to create leeway for major central banks to embark on monetary policy easing measures in the upcoming year. The trajectory of monetary policy decisions by these central banks is poised to retain its significance as a pivotal factor shaping global financial market conditions. Should the US Federal Reserve initiate a cycle of monetary policy easing, resulting in narrower yield differentials between the US and other economies, it could potentially mitigate the strength observed in the US dollar since 2022. Consequently, this might trigger portfolio reallocations towards assets in emerging markets, thus offering a more favourable outlook for capital flows into these economies.

Nevertheless, the global economic outlook faces notable downside risks stemming from various factors. The persistence of higher-than-anticipated inflation could prolong elevated interest rates, thus dampening consumer spending. Such inflationary pressures might stem from unexpected surges in commodity prices and more robust-than-expected wage growth. Moreover, prolonged high interest rates in advanced economies, coupled with potential strains in the banking sector and spill overs from China's economic slowdown, could precipitate a sharp tightening in financial conditions, including in emerging markets. The lagged impact of existing rate hikes, if larger than expected, could even precipitate recessions in advanced economies. Geopolitical tensions in regions such as the Middle East and Ukraine pose additional risks, potentially disrupting supply chains, global trade, and financial markets, while exacerbating volatility in commodity prices. Moreover, further deterioration in US-China relations could exacerbate global trade fragmentation.

On the domestic front, the Malaysian economy is poised to grow within the range of 4%–5% in 2024, driven primarily by resilient domestic expenditure complemented by an anticipated recovery in exports. Continued growth in employment and wages is expected to bolster household spending, while improvements in tourist arrivals and spending are anticipated. Investment activity is projected to be propelled by the ongoing implementation of multiyear projects across both private and public sectors, further supported by catalytic initiatives outlined in national master plans.

However, the growth trajectory remains vulnerable to downside risks, particularly from weaker-than-expected global growth and potential escalation of geopolitical conflicts, which could adversely impact Malaysia's trade performance. Domestically, severe shocks to commodity production due to adverse weather conditions or prolonged maintenance periods could hamper growth prospects. While subsidy rationalisation initiatives might exert downward pressure on growth, targeted cash assistance from the government could partially offset these effects. Conversely, upside risks to growth stem from increased spill over effects from the technology upcycle, enhanced tourism activity, and accelerated implementation of existing and new investment projects.

Looking ahead, despite a negative output gap in 2023, projections indicate a reversal to positive territory in 2024. This shift is anticipated as actual output is expected to outpace potential output growth, supported by ongoing expansion in domestic and external demand. Over the medium term, potential output is anticipated to be buoyed by heightened investments and productivity enhancements stemming from the continued implementation of multi-year investment projects and national master plans, aiming to revert growth rates to pre-crisis levels.

Key highlights of Bank Negara Malaysia’s (BNM) 2023 Annual Report, include:

• Demand Side Economy: Domestic demand is anticipated to retain its role as the primary driver of economic growth, with household spending poised to exhibit accelerated expansion. This growth is underpinned by improving labour market dynamics, characterised by heightened income growth and targeted government assistance initiatives. These factors are expected to mitigate to some extent the effects of elevated living costs, the implementation of low-value goods (LVG) tax, and the uptick in sales and services tax (SST) on household expenditure. The persistent improvement in labour market conditions is anticipated to provide ongoing support to household spending, with employment levels projected to continue their upward trajectory, approaching historical averages. This trend is buoyed by sustained demand for labour, particularly within sectors closely tied to tourism and external trade, contributing to a stabilisation of the unemployment rate around its historical average of 3.3%. Concurrently, as employment growth persists and production activity strengthens to meet burgeoning demand, wage levels are forecasted to experience further escalation throughout 2024.
  
  Private consumption is forecasted to experience robust growth of 5.7% in 2024, compared to 4.7% in 2023, primarily driven by the ongoing enhancements in labour market dynamics. The expansion in employment opportunities is anticipated to persist, buoyed by a sustained demand for labour. Projections indicate a decline in the unemployment rate to 3.3% (3.4% in 2023). Furthermore, income growth is expected to be propelled by increased wages within the manufacturing and service sectors. Government initiatives, including the expansion of Sumbangan Tunai Rahmah and early incentive payments for civil servants, are anticipated to further bolster household expenditure.
  
  Private investment is anticipated to register a notable improvement of 6.1% in 2024, compared to 4.6% in 2023. This growth trajectory is expected to be underpinned by the realisation of both new and ongoing investment projects, bolstered by a more favourable global and domestic economic environment. Encouragingly, investment sentiment remains positive, as evidenced by the substantial approved investment amounting to RM330bn in 2023, a notable increase from RM268bn in 2022. Particularly noteworthy is the concentration of investment in the electrical and electronics (E&E) products, as well as information and communications technology (ICT) subsectors. The progress of approved projects in recent years has been commendable, with 74% of manufacturing projects approved between 2021 and 2023 either being implemented or completed. Moreover, the substantial value of early-stage construction work undertaken, reaching RM31.5bn in 2023 compared to RM26.3bn in 2022, augurs well for positive investment prospects moving forward.
  
  Continued public investments in extensive transport and digital infrastructure initiatives are poised to bolster economic growth, complemented by ongoing governmental reforms aimed at improving the investment landscape and executing strategies outlined in strategic master plans. Notably, catalytic projects like the Kasawari Carbon Capture and Storage (CCS) led by PETRONAS, the Hybrid Hydro-Floating Solar (HHFS) Photovoltaic project spearheaded by Tenaga Nasional Berhad, and the deployment of Electric Vehicle (EV) charging stations by Gentari are underway, poised to stimulate investments well into the future. Public investment is expected to surpass its pre-Covid average growth for the third consecutive year, projected at 6.2% in 2024 compared to an average of - 0.2% from 2011 to 2019. This expansion is driven by both the General Government and public corporations, primarily directed towards ongoing large-scale infrastructure undertakings such as the East Coast Rail Link (ECRL), Pan Borneo Highway, and Rapid Transit System Link (RTS Link). The government's allocations for fixed asset spending primarily target transportation, education, and healthcare projects, reflecting a commitment to enhancing essential public services and infrastructure.
  
  BNM foresees public consumption expanding by 3.2% in 2024, a slight decrease from 3.9% in 2023. This growth trajectory will continue to be buoyed by emoluments spending, driven by annual salary increments for civil servants and new recruitments in the public sector. Conversely, expenditure on supplies and services is expected to increase at a more restrained rate, aligning with the government's dedication to enhancing the efficiency of spending.
   
• Supply Side Economy: On the supply side, the outlook for most sectors in 2024 appears positive, with the services and manufacturing sectors positioned as primary drivers of overall growth. The services sector is expected to expand by 5.5% (compared to 5.3% in 2023), primarily propelled by advancements in business-related subsectors. Enhanced external demand coupled with ongoing private and public construction endeavours are anticipated to bolster segments such as real estate and business services, as well as transport and storage. Furthermore, the continued rollout of 5G network coverage and subsequent rise in subscriptions are poised to stimulate growth in the information and communication subsector. Consumer-related subsectors are forecasted to reap benefits from a resurgence in tourism activities, partially fuelled by initiatives like the 30-day visa-free travel for nationals from China and India, alongside resilient household spending supported by an ameliorating labour market landscape.
  
  The manufacturing sector is poised to witness expansion of 3.5% in 2024, a notable improvement from the 0.7% growth recorded in 2023, supported by both the recovery in export-oriented industries and sustained growth in the domestic-oriented cluster. Notably, E&E production is anticipated to experience a modest rebound in the first half of the year, followed by a more robust recovery in the latter half. This resurgence will be driven by the upswing in the global technology cycle, spurred by increasing external demand for integrated circuits and semiconductors driven by technological megatrends such as digitalisation, Internet of Things (IoT), 5G network, and EV. Concurrently, the primary-related cluster is expected to exhibit steady growth, supported by improving upstream supply conditions and production ramp-up in one of Johor's major oil refineries. Moreover, growth in the consumer-related cluster will continue to be buoyed by the ongoing recovery in tourism activities and normalisation of vehicle sales. Meanwhile, the construction-related cluster is anticipated to benefit from the sustained progress of multi-year investment projects, further contributing to the sector's expansion.
  
  The agriculture sector is anticipated to undergo a contraction of 0.5% in 2024, following a 0.7% decline in 2023, primarily attributed to dry weather conditions associated with El Niño and the lingering effects of underfertilisation in previous years, leading to reduced oil palm production. However, ongoing efforts in training migrant workers are expected to mitigate the impact by enhancing productivity levels. Moreover, the adverse weather patterns could also adversely affect other agriculture subsectors, including paddy farming and fisheries, posing additional challenges to sectoral growth.
  
  The mining sector is forecasted to experience accelerated growth at a rate of 3.5% in 2024, surpassing the 1% expansion recorded in 2023, primarily fuelled by heightened production in existing oil and gas fields. Notably, the ramp-up of key oil fields in Sarawak is expected to drive increased oil production, while enhancements in production within Block SK320 and the commencement of a new field in Sarawak will contribute to higher natural gas output. These developments are anticipated to offset any output losses resulting from maintenance-related closures and production declines in maturing fields.
  
  The construction sector is poised for higher growth at 6.7% in 2024, surpassing the 6.1% recorded in 2023, propelled by sustained activities in civil engineering, special trade, and residential subsectors. This expansion will be bolstered by the continuation of both new and ongoing large infrastructure projects and small-scale initiatives outlined in Budget 2024, NIMP 2030, and NETR. Additionally, the residential subsector is expected to contribute to growth through new housing launches, supported by an uptick in housing demand.
   
• Current Account Balance Outlook: BNM anticipates that the current account of the balance of payments will exhibit a higher surplus ranging between 1.8% to 2.8% of GDP in 2024, marking an enhancement from the 1.2% of GDP recorded in 2023, the lowest since 1997 (-5.9%). This improvement is primarily attributed to a projected increase in the goods surplus, driven by a robust rebound in exports growth that surpasses the recovery in imports growth. Concurrently, the services account is poised to diminish its deficit, chiefly fuelled by a bolstered surplus in the travel account as tourist arrivals trend towards pre-pandemic levels. However, the overall services account is anticipated to remain in deficit, indicative of the persisting dependence on foreign services, particularly in transportation. Despite these positive developments, the ongoing deficit in the primary income segment, attributed to continued income payments to foreign investors in Malaysia amid improved export earnings, and a sustained deficit in the secondary income account, primarily due to consistent outward remittances by foreign workers, are expected to temper the overall improvement in the balance of payments.
   
• Headline inflation is forecast to average between 2.0% and 3.5% in 2023 (PIVB: +3.0%; 2023: 2.5%). The expanded forecast range reflects the incorporation of potential inflationary pressures arising from the implementation of fuel subsidy rationalisation. Both domestic policy factors and external influences pose significant upside risks to the inflation outlook. Domestically, adjustments to essential item prices, particularly in energy and food sectors, could elevate prices, especially if blanket fuel subsidies are modified. Given fuel's substantial share in the CPI basket, any adjustments would directly impact headline inflation, albeit with a likely short-term effect as base effects diminish. However, the extent of these risks hinges on potential knock-on effects, as firms may raise prices to offset increased costs, thereby amplifying broader price pressures. While wage-price dynamics present a potential inflationary tail risk, such secondround effects are deemed minimal in Malaysia due to the alignment of wage increases with productivity growth. Furthermore, core inflation is envisaged to average between 2.0% and 3.0% in 2024 (3.0% in 2023).
  
  Nevertheless, the short-term ramifications of fuel subsidy rationalisation on inflation and growth are contingent upon the magnitude and timing of price adjustments. Additionally, the implementation of targeted assistance alongside subsidy rationalisation will play a crucial role in mitigating the impact on vulnerable segments during the transition period.
  
  Externally, BNM has highlighted exchange rate fluctuations and global commodity price movements as further sources of inflationary pressure. Import-sensitive sectors like food and transportation are particularly vulnerable to exchange rate pass-through effects, potentially exacerbating inflationary pressures. In addition to exchange rate risks, upward pressure on food inflation may stem from persistent factors such as geopolitical tensions and weather disruptions. Nevertheless, downside risks to inflation primarily emanate from weaker global growth prospects, which could alleviate cost pressures by exerting downward pressure on commodity prices.
   
• Monetary Policy Outlook. Having reverted to pre-pandemic levels in 2023, monetary policy in 2024 is poised to prioritise maintaining a stance conducive to sustainable growth while effectively managing inflationary risks. BNM emphasises that the current OPR level aligns with an accommodative monetary policy stance, reflecting an assessment of prevailing inflation and growth prospects. Consequently, we anticipate that the OPR will remain unchanged at 3.00% throughout the course of 2024.
  
  In light of significant potential shifts in key government policies and associated mitigation measures, the Monetary Policy Committee (MPC) will persist in evaluating their impacts on inflation dynamics and demand conditions. BNM has underscored the MPC's awareness of various upside risks to the inflation outlook, encompassing global commodity price fluctuations and financial market developments. Despite an anticipated improvement in growth for 2024, the outlook remains susceptible to downside risks such as weaker-than-expected external demand and substantial declines in commodity production. However, upside prospects for growth could materialise from positive spill overs from the technological upswing, enhanced tourism activity, and expedited implementation of existing and forthcoming projects.

Source: PublicInvest Research - 21 Mar 2024