As we approach mid-2024, our outlook on the global economy remains steady despite various notable developments. Optimism is cautiously emerging, highlighted by modest growth amid ongoing geopolitical uncertainties. Inflation rates are declining more rapidly than expected, while labour markets continue to exhibit robust health with unemployment rates at historic lows. An upswing in private-sector sentiment is evident, although the effects of tighter monetary policies are becoming increasingly pronounced, particularly in the housing and credit markets.

The recovery is uneven across regions, with the United States (US) and several major emerging markets showing strong growth, contrasting with the slower expansion seen in European economies. This heterogeneous macroeconomic environment is expected to persist, with variations in the pace of inflation reduction and interest rate adjustments, along with differing fiscal consolidation needs.

China's post-pandemic slowdown is characterised by weakening export growth, deflationary pressures in its heavily indebted housing market, and adverse demographic trends that may dampen long-term consumer spending. However, policy stimulus in 1Q24 provided a temporary boost to growth, countering some immediate challenges in the property market. This short-term growth spurt does not eliminate the structural issues China faces in the longer term. Increased policy support, such as elevated government spending, could stimulate demand beyond expectations. Conversely, a protracted downturn in the property sector could curb investment, erode household wealth, dampen consumer confidence and spending, and impair revenue collection, limiting fiscal support, especially at the local government level.

Geopolitical risks continue to elevate economic uncertainty however. The ongoing conflict in Ukraine and heightened tensions in the Middle East pose significant threats to global stability, impacting energy and financial markets. Potential escalation of these conflicts exacerbates the already fragile economic balance. Furthermore, upcoming elections in 40 countries representing over 40% of global GDP introduce additional risks to the economic outlook. The scrutiny of candidates' positions on climate change and foreign policy, particularly in the US and UK, will be crucial in shaping international relations and economic policies.

While the overall risk outlook is becoming more balanced, substantial uncertainties persist. Elevated geopolitical tensions could disrupt energy and financial markets, increasing inflation and stunting growth. High-cost pressures, especially in services, may slow inflation reductions and delay policy interest rate decreases, exposing financial vulnerabilities and potentially leading to sharper labour market slowdowns. Higher real interest rates might have a more significant impact than anticipated, with already substantial debt-service burdens likely to increase as low-yield debt is refinanced or fixed-term borrowing rates are renegotiated. Sectors such as commercial real estate face ongoing pressure, with corporate bankruptcies and defaults above pre-pandemic levels in several countries posing risks to financial stability.

Conversely, demand growth could exceed expectations, particularly in advanced economies if households and businesses utilise savings accumulated during the pandemic. Additionally, sustained labour force growth in many countries could accelerate the decline in inflation. In summary, while positive indicators are emerging, the global economic recovery remains fragile and uneven

Global economy shows grit amid adversity

Amidst the myriad challenges facing the global economy, a revised expansion of +3.0% YoY for 2024, up from our earlier estimate of +2.6%, and a steady +3.0% in 2025 is noteworthy. Nevertheless, these projections fall short of the historical annual average of +3.8% (2000 – 2019), primarily due to restrictive monetary policies, gradual fiscal support withdrawal, and sluggish productivity growth. Advanced economies are expected to see modest growth, largely driven by a rebound in the euro area following its subdued performance in 2023. In contrast, emerging markets and developing economies are anticipated to maintain stable growth trajectories, albeit with regional variances.

In 2023, despite adverse factors such as tighter financial conditions, the ongoing war in Ukraine, and conflicts in the Middle East, global growth sustained an annual rate slightly above +3%, surpassing previous forecasts and mirroring prepandemic levels. This resilience, however, was unevenly distributed. The United States experienced robust growth, fuelled by strong household consumption and expansionary fiscal policies, while large emerging-market economies also showed solid performance. Conversely, many advanced economies, particularly in Europe and low-income countries, witnessed weakened growth. The euro area's stagnation is attributed to the lingering impact of the 2022 energy price shock and slowed credit growth in bank-dependent economies.

China's growth strengthened in 1Q24, aided by policy stimulus countering property market weaknesses. In contrast, several vulnerable countries faced restrictive financial conditions and climate disruptions. Despite the El Niño event of mid-2023 setting global temperature records and marking 2023 as the warmest year in modern history, its impact on global agricultural output and commodity prices was minimal.

In the latter half of 2024, our focus will be on the resilience of economic recovery, the deceleration of inflation, and the pace of interest rate reductions. If inflation metrics align with target levels and central banks ease borrowing costs, this could bode well for the economy. However, persistent geopolitical tensions, reduced consumer spending power, and stringent fiscal policies are likely to impede the speed of recovery in the near term. Escalating geopolitical tensions could lead to volatile commodity prices and further trade fragmentation, exacerbating disruptions in trade networks. Trade policy uncertainty has surged to exceptionally high levels, surpassing those observed during major global elections since 2000.

Despite potential upside surprises, global risks remain skewed to the downside. Persistent inflation could delay monetary easing, and a prolonged high-interestrate environment would dampen global activity. Some major economies may underperform current growth expectations due to domestic challenges, and climate-related natural disasters could further impede activity. However, if global inflation moderates more rapidly than assumed, faster monetary policy easing could ensue. Additionally, the United States could experience stronger-thanexpected growth.

Inflation may prove more persistent than projected, declining at different speeds

A combination of base effects, easing energy prices, restrictive monetary policies, and reduced supply-side constraints has helped to alleviate price pressures. However, recent declines in the consumer price index (CPI) have been more persistent than many economists anticipated. Baseline projections suggest that both core and headline inflation will continue to decline over 2024 - 2025, assuming no surges in energy or food commodity prices and a reduction in unit cost growth as productivity improves, wage gains moderate, and markups ease. In this scenario, the rate of increase in service prices, heavily influenced by labour costs, is expected to return to pre-pandemic levels by 2025. The projected easing of inflation aligns with inflation expectations remaining anchored around central bank targets.

The World Bank's Global Economic Prospects report forecasts that, excluding a small number of countries facing unique domestic inflation challenges, global inflation will decline to 3.5% in 2024, further easing to 2.9% in 2025, and 2.8% in 2026, aligning with average country inflation targets. This deceleration is expected to be driven by softening core inflation as services demand moderates and wage growth slows, alongside a modest decline in commodity prices. Surveys of inflation expectations similarly predict gradual global disinflation over the next two years.

The IMF projects global headline inflation to decrease from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025. Advanced economies are anticipated to experience a more pronounced initial decline, with a 2.0 percentage point reduction in 2024, while emerging market and developing economies will see a more significant decline in 2025. Additionally, the IMF indicates that for economies with an inflation target, headline inflation is projected to be 0.5 percentage points above target for the median economy by 3Q24 on a QoQ basis. In advanced economies, the median gap between actual and target inflation is expected to be just 0.3 percentage points by 3Q24, suggesting a faste return to target levels than in emerging market and developing economies. Most economies are expected to reach levels within a quarter of a percentage point of their targets by 2Q25.

Despite these projections, significant risks remain. The anticipated disinflation may proceed more slowly than expected, with the final phase potentially proving more challenging than the progress made thus far. Risks from ongoing conflicts in the Middle East, potential spikes in energy or food prices due to intensified OPEC+ production cuts, or disruptions from extreme weather or conflict affecting food supplies persist. Additionally, if the expected productivity growth does not materialise, wage gains remain elevated, or mark-ups increase, unit cost growth could continue rising rapidly. In such cases, inflation expectations might drift upwards, complicating efforts to return inflation to target levels. Consequently, central banks might need to maintain restrictive policy settings for a longer duration, raising the risk of significantly weakening demand and triggering sharp declines in bond and equity prices.

US: Slowing growth, persistent inflation and political uncertainty loomIn

1Q24, the US economy expanded at a moderated pace, with growth revised down to 1.3% QoQ SAAR from 3.4% in the previous quarter. This deceleration coincided with a notable decline in migrant encounters, which fell to approximately 190,000 per month in February and March, significantly below the peak of over 300,000 recorded in December 2023. Despite slower growth, underlying inflation pressures remained strong, with core PCE—the Fed’s preferred inflation gauge excluding food and energy—rising to 3.6% from 2.0% in previous quarters.

Looking ahead, economic growth is projected to decelerate further by mid-2024 due to the lagged effects of monetary tightening and more restrictive financial conditions. Households will face pressures from depleting excess savings, tighter lending standards, and elevated service costs, particularly in housing. Although the FED has maintained the FFTR at 5.25%-5.50%, we anticipate rate cuts in September and December 2024, contingent on inflation trends.

Political uncertainty surrounding the November presidential election, especially the potential return of Donald Trump, poses additional risks. A Trump re-election could lead to stricter trade policies and increased pressure on the FED to lower rates faster in 2025, potentially destabilising fiscal projections. Moreover, proposed tax cuts could provide short-term economic stimulus but worsen the fiscal outlook.

Higher borrowing costs and slower growth have increased credit stress for businesses and households, with these trends likely to persist. The risk of inflation reacceleration could extend into late 2024 and 2025, driven by strong personal consumption and rising stock prices, which could push up prices in sectors like vehicles and financial services. Additionally, rent disinflation could slow due to lower mortgage rates and ongoing housing shortages.

The services sector, accounting for 78% of US GDP, showed resilience, with the ISM services index rebounding to 53.8 in May from 49.4 in April. However, the manufacturing sector's outlook remains uncertain, as indicated by the ISM manufacturing survey's contraction in May. We maintain our 2024 US growth forecast at 1.4%, down from 2.5% in 2023, reflecting persistent inflation risks and political uncertainties.

China: Prospects amidst trade tensions and domestic challenges

China's economic outlook is fraught with risks, including a potential protracted downturn in the property sector, which could significantly curb investment and erode household wealth. Policy stimulus in 1Q24 provided a temporary boost, yet long-term structural issues such as an aging population, regulatory uncertainties, and weak private investment persist. While the property market's drag on growth is expected to lessen, a full recovery remains doubtful without substantial policy interventions.

Exports are set to be a primary growth driver, although escalating trade tensions with the US and the EU present significant risks. In May, the White House announced tariff hikes on US$18bn worth of Chinese imports, effective from August. The potential return of Trump and his proposed 60% tariff on all Chinese goods, coupled with the EU possibly mirroring US restrictions, exacerbates these risks. Despite these challenges, we project China's export growth at 7.0% for 2024, supported by robust tech demand and anticipated easing of global financial conditions.

Given the divergence between domestic and external demand, we foresee sustained export growth driven by a low base effect, strong US economic performance, a global tech upswing, competitive Chinese product pricing, and pre-emptive buying ahead of anticipated tariffs. Consequently, we anticipate a growth rate of ~4%, though revisions in GDP measurement methodologies in the financial sector pose downside risks. Despite strong external demand, weak domestic consumption and investment growth are likely to persist.

Overall, China's growth faces balanced risks. Robust external demand and policy easing offer upside potential, while geopolitical tensions and domestic challenges pose significant downside risks. Beijing's pivot from building public housing to ensuring the completion of pre-sold homes marks a crucial step towards resolving the housing crisis and restoring buyer confidence. However, the successful delivery of housing projects will take time and require substantial policy support, necessitating patience from market participants.

Malaysia: Economic prospects amidst global uncertainties in 2H24

Global supply chains are experiencing profound changes driven by geopolitical and diversification considerations, redirecting investment flows to different countries. Malaysia emerges as a notable beneficiary, especially in the electronics sector, which has witnessed substantial FDI and robust growth in E&E exports over the past decade. This momentum has accelerated postpandemic and amid the US-China trade war, presenting lucrative opportunities for Malaysian E&E stocks.

As the world's sixth-largest exporter of electronics and semiconductors, Malaysia accounts for 7% of global semiconductor trade and 13% of back-end operations. This significant role is highlighted by the strong correlation between Malaysia’s E&E exports and global semiconductor sales. Local semiconductor players primarily focus on Outsourced Semiconductor Assembly and Test (OSAT) services and back-end equipment provision, which are crucial in the production workflow of all E&E products.

Given Malaysia's significant reliance on trade, with a high total trade value relative to its GDP and a strong export orientation, moderate global economic growth could negatively impact its exports in 2024. This vulnerability is linked to Malaysia's dependence on global economic health, particularly in electronics, notably the semiconductor industry. Any downturn in developed economies like the US, China, and the EU could adversely affect trade within ASEAN. However, this downside risk is expected to be partially offset by the anticipated upturn in electronics exports. Consequently, Malaysia's exports of goods and services are projected to rebound to +5.4% in 2024.

The World Trade Organization (WTO) forecasts a rebound in global merchandise trade, projecting growth rates of 2.6% in 2024 and 3.3% in 2025, following a 1.2% contraction in 2023. This decline came after a 3.0% expansion in 2022 despite the war in Ukraine. High energy prices and inflation significantly impacted demand for trade-intensive manufactured goods last year, but as inflationary pressures ease and real household incomes improve, demand is expected to gradually recover over the next two years. The 1.2% decline in 2023 masks substantial regional variations. Import demand fell sharply in Europe, declined in North America, remained flat in Asia, and increased in major fuel-exporting economies. This weak demand constrained export volumes in Europe and limited a stronger recovery in Asia, while other regions experienced mixed outcomes. If the forecast materialises, Asia is expected to contribute more significantly to trade volume growth in 2024 and 2025. However, considerable uncertainty surrounds this forecast due to numerous global economic risk factors, including regional conflicts, geopolitical tensions, and rising protectionism. The trade volume growth in 2024 could range from as high as 5.8% to as low as -1.6%, reflecting potential volatility in the global trade environment.

In April, global semiconductor sales rose by 1.1% MoM, marking the first positive monthly growth of the year and signalling increasing market momentum. Throughout 2024, the sector has consistently achieved double-digit YoY gains each month. The latest industry forecast indicates robust annual growth, with sales in the Americas and Asia Pacific expected to increase by 25.1% and 17.5%, respectively. The World Semiconductor Trade Statistics (WSTS) has revised its global semiconductor market growth forecast upwards to 16%, exceeding the previous estimate of 13.1%. For 2025, WSTS anticipates a growth rate of 12.5%, bringing the market to an estimated US$687bn. This optimistic outlook is particularly significant for Malaysia's manufacturing sector, where E&E exports account for over 40% of total exports. As the 10th largest global exporter of E&E products and the 6th largest exporter of semiconductors in 2023, Malaysia is poised to benefit substantially from these favourable projections.

In the near term, the elasticity of global trade in response to global output is expected to remain subdued compared to pre-pandemic levels, primarily due to tepid investment growth and widespread trade restrictions. The outlook for global trade is clouded by various downside risks, including weaker-than-expected global demand, escalating geopolitical tensions, and further disruptions in maritime transport. Upcoming elections in numerous countries add another layer of uncertainty, potentially leading to more protectionist trade policies that could dampen trade prospects and economic activity. Recent incidents such as attacks on commercial vessels in the Red Sea and climate-induced disruptions in the Panama Canal have affected maritime transit and freight rates along these crucial routes. Despite these challenges, global supply chain pressures and delivery times have not significantly worsened, with adverse effects largely confined to specific regions and industries.

Strategic Initiatives and Resilient Sectors to Bolster Malaysia

In 2H24, Malaysia's economic outlook appears promising amidst global uncertainties. This optimism is bolstered by strategic initiatives, including the slightly expansionary Budget 2024, the National Energy Transition Roadmap (NETR), the New Industrial Masterplan 2030 (NIMP 2030), and the Mid-Term Review of the 12th Malaysian Plan (12MP MTR), all aligned with the MADANI Economic Framework. These initiatives are anticipated to elevate Malaysia's real GDP growth to +4.7% in 2024, driven by robust domestic demand, sustained FDI inflows, continued and prospective investments, and a resurgence in electronics exports amid a recovering tech cycle. The pace of fiscal consolidation is expected to remain gradual to prevent hindering growth while managing inflationary risks. Fiscal measures introduced in 1H24 and subsequent subsidy rationalisation in 2H24 are anticipated to moderately impact inflation. We foresee BNM maintaining the policy rate at 3.0% in 2024, aligning with the growthinflation dynamics. This prudent fiscal strategy, coupled with a neutral monetary stance, is deemed appropriate amidst ongoing global challenges. Resilient domestic demand likely to be fuelled by private consumption

With robust GDP growth in 1Q24, our forecast for 2024 remains at +4.7% (2023: 3.6%). The salary increment starting 1 December, projected to cost the government RM10bn (0.5% of GDP), will further enhance consumption along with the progressive wage project scheduled from June to August this year. Additionally, expected withdrawals from EPF Account 3 amounting to RM30bn starting 11 May are set to boost private consumption in 2H24. By 22 May, 3.03 million withdrawal applications had been approved, totalling RM5.52bn.

Malaysia's economic resilience is expected to continue, driven by strong domestic demand amid global uncertainties. Private consumption, which accounts for around 60% of GDP, will likely remain the primary growth driver. This is supported by a robust labour market, rising incomes, expansion in wholesale and retail trade, and increased tourism. We anticipate steady growth in consumer spending, buoyed by controlled inflation and a declining unemployment rate, with private consumption projected to grow by 5.6% YoY in 2024, surpassing the 4.7% growth seen in 2023.Table 2: Malaysia GDP Numbers (2024F) Gro

In the realm of regulatory developments, Malaysia anticipates parliamentary approval of an innovative framework for carbon capture utilization and storage (CCUS) by November. Meanwhile, substantial strides have been achieved within the Johor-Singapore Special Economic Zone (JS-SEZ), highlighted by the establishment of an Investment Facilitation Centre and the imminent implementation of QR code-enabled immigration clearance from mid-June onwards. Detailed insights into these initiatives are poised to emerge with the unveiling of Budget 2025 slated for October, shaping future economic strategies and investments.

Persistent downside risks amidst upward tilting 2H24 outlook

Despite the robust growth projections, Malaysia's economic trajectory faces significant downside risks. Global economic slowdowns and escalating geopolitical tensions pose threats to Malaysia's export performance. Domestically, unforeseen disruptions in commodity production due to adverse weather conditions or extended maintenance periods could exacerbate vulnerabilities. Moreover, sluggish recovery in external demand, particularly from key trading partners like China, coupled with geopolitical uncertainties, may exert upward pressure on commodity prices, further complicating growth prospects. Despite potential downward pressure from subsidy rationalisation efforts, targeted government cash injections offer some offsetting relief.

Conversely, several upside catalysts could bolster economic resilience. Amplified benefits from the ongoing technology boom, heightened tourism activity, and accelerated execution of both current and new investment ventures might propel economic expansion beyond expectations. Strategic initiatives outlined in national development blueprints and increased realisation of approved investment inflows provide supplementary momentum. Additionally, a surge in tourist arrivals and expenditures is poised to deliver positive economic contributions, with Malaysia anticipating 27.3 million tourist visits in the fiscal year. This upswing is largely fuelled by government incentives such as charter flight subsidies, Visa Liberalization measures, and expanded international tourism promotion initiatives. In sum, while risks persist, the growth outlook tilts favourably upwards, underpinned by these pivotal factors supporting economic vitality.

Hoping for a bullseye for a targeted RON95 petrol subsidy

Following recent diesel subsidy adjustments, we opine that the Malaysian government is set to reform the RON95 petrol subsidy, targeting the exclusion of higher-income households and non-residents. The timing and specifics of this recalibration are crucial, likely resulting in an increase in RON95 petrol prices from the current subsidised rate. To cushion the impact on lower-income groups, targeted cash transfers are anticipated, utilizing data from the Central Database Hub (PADU).

Rather than implementing a dual pricing model, a straightforward price adjustment is expected, aligning with Budget 2024's fiscal consolidation objectives aimed at significantly reducing subsidy expenditures. Savings from recalibrated subsidies across various sectors will contribute to these fiscal goals. A phased price increase could provide substantial savings over the next year, with a modest rise by mid-2024 aligning with budgetary targets. If delayed until later in the year, a more significant increase might be necessary.

Delaying the RON95 subsidy reforms until late 2024 remains an option, with more details likely to emerge during the Budget 2025 presentation. A gradual approach to subsidy reform is crucial to avoid sudden inflationary shocks. This strategy aims to balance fiscal responsibility with inflation control, targeting our in-house forecast for an annual inflation rate around 3%.

Navigating Malaysia’s inflation tightrope

Looking forward into 2024, inflation is projected to chart a stable course, influenced by resilient demand dynamics and subdued cost pressures. The trajectory of inflation hinges significantly on the effective execution of domestic policies governing subsidies and price controls, alongside the volatility in global commodity markets and developments in financial sectors. Notably, the impact of recent adjustments, such as the services tax hike and water tariff increments, is anticipated to be marginal, exerting minimal influence on overall inflation trends.

Bank Negara Malaysia's (BNM) assessments indicate a forecast range for headline and core inflation between 2.0% to 3.5% and 2.0% to 3.0%, respectively, over the year. Prime Minister Anwar Ibrahim's recent endorsement of diesel subsidy reductions, expected to yield annual savings of RM4 billion, emphasises strategic exemptions for Sabah, Sarawak, and commercial vehicles to cushion the impact on inflation and mitigate cost-of-living pressures for lowerincome segments. This initiative aligns with earlier policy objectives, with swift implementation expected to prevent anticipatory stockpiling ahead of price adjustments. However, at the time of writing, we believe that the direct impact on headline inflation is likely to be minimal. Given that diesel's weight in the overall headline CPI is just 0.2%, the potential for significant inflationary effects is low. A straightforward calculation shows that a 1% increase in diesel prices would result in a 0.002% rise in the overall inflation rate. Therefore, floating the diesel price from RM2.15 to RM3.35, representing a 55.8% increase, would lead to approximately a 0.112% increase in the overall inflation rate.

Moreover, amidst renewed fiscal discipline, the potential introduction of targeted subsidies for RON95 in the latter half of 2024 remains under consideration. However, the announced substantial hike in civil servant salaries by over 13%, amounting to approximately RM10 billion, poses challenges to fiscal targets and could amplify inflationary pressures by elevating wage expectations across private sectors. Concurrently, the rollout of EPF Account 3, injecting around RM30 billion into consumer spending, aims to counterbalance sluggish global growth and rising living costs following subsidy rationalisation, albeit potentially fuelling demand-driven inflationary pressures. We maintain our in-house headline inflation projection at 3% YoY, with risks skewed towards the lower end of the official 2.0-3.5% range, contingent on the timing of RON95 subsidy rationalisation.

These dynamics present upside risks to BNM's outlook on the Overnight Policy Rate (OPR). Despite global indications leaning towards rate cuts, we maintain our forecast that BNM will maintain the OPR at 3% throughout 2024. The robust economic indicators emerging from the United States suggest a possible slowdown or moderation in the Federal Reserve's easing cycle, potentially strengthening the USD and applying depreciation pressure on the Malaysian ringgit. Such external monetary conditions could intensify upward pressures on the OPR, necessitating vigilant monitoring and proactive policy responses.

Ringgit strengthens through strategic measures amid global economic shifts

In 2Q24, the Malaysian ringgit demonstrated robust resilience, outperforming its regional peers by appreciating to 4.70 against the US dollar, marking a notable recovery from April's levels near 4.80. This upward trajectory was underpinned by strategic initiatives from Bank Negara Malaysia (BNM) aimed at incentivising the repatriation of foreign exchange earnings among government-linked entities and corporate sectors, thereby bolstering demand for the local currency. Notably, these measures were implemented without resorting to immediate interest rate adjustments. Looking forward, our outlook anticipates a potential retracement in the ringgit's strength in anticipation of an impending Federal Reserve rate reduction expected in September. The Renminbi's resurgence and BNM's steadfast maintenance of the OPR are expected to reinforce the ringgit's stability, with our year-end projections placing USD/MYR within the range of 4.55 to 4.65. This forecast hinges on sustained improvements in Malaysia's fiscal and current account balances, alongside the normalisation of US Federal Funds Rate movements by the close of 2024.

The domestic macroeconomic environment, particularly the transparent approach to fuel subsidy rationalization, is anticipated to provide additional support for the ringgit. Nevertheless, robust economic indicators and inflation trends in the US could delay FFR reductions, bolstering the USD and potentially exerting downward pressure on the ringgit. Despite these external pressures, our forecast remains aligned with the above-mentioned range, reflecting a balanced assessment of domestic policy support and global economic dynamics.

Source: PublicInvest Research - 26 Jun 2024