OVERVIEW

Malaysia's economic recovery strengthened in 2Q24, with GDP growth accelerating to 5.9% YoY (1Q24: +4.2% YoY), slightly above market expectations of 5.8%. This robust expansion was primarily driven by strong household spending, buoyed by festive and school holidays, the disbursement of Sumbangan Tunai Rahmah (STR) Phase 2 in April 2024, and withdrawals from Employees Provident Fund (EPF) Account 3. The labour market also showed significant improvement, further supporting consumption growth. Additionally, the Industrial Production Index (IPI) maintained a positive trajectory for six consecutive months, while external trade saw notable gains during the quarter. The economy also benefited from increased fixed capital investments, the advancement of large-scale projects, and rising demand for data centres. These developments, coupled with strong tourism activity, underscore the resilience of Malaysia's economy, positioning it for sustained growth in the upcoming quarters.

In 2Q24, all supply-side sectors demonstrated stronger growth, with the Services and Manufacturing sectors remaining the key drivers of overall economic performance. On the demand side, the expansion was primarily supported by robust Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF). The economy's value at current prices reached RM472.4bn, while at constant prices, it stood at RM400.7bn. As a result, Malaysia’s economy recorded a 5.1% YoY growth in 1H24, outpacing the 4.1% YoY growth observed during the same period in 2023.

Malaysia's economic growth in 2H24 is anticipated to be primarily driven by robust expansions in investment activity and resilient household spending, with additional support from a recovery in exports. Investment momentum is expected to be underpinned by the ongoing execution of multi-year projects across both the private and public sectors, further enhanced by the implementation of catalytic initiatives under national master plans and a higher realization of approved investments. Private consumption will continue to benefit from sustained income growth and the introduction of larger policy measures, reinforcing domestic demand. Additionally, the export sector is poised for an uplift, fuelled by increased spillover effects from the global tech upcycle, while the tourism sector is set to experience further gains in tourist arrivals and spending.

However, the growth outlook is not without downside risks. Weaker-than- expected external demand, potential escalations in geopolitical conflicts, and lower-than-anticipated commodity production could temper the pace of economic expansion. Nonetheless, the economy may see upside risks from stronger-than-expected spillovers from the global tech upcycle, a more vigorous recovery in tourism activities, and the accelerated implementation of new and existing investment projects, which could collectively enhance Malaysia’s economic prospects in the near term.

On a seasonally adjusted basis, Malaysia's GDP expanded by 2.9% QoQ in 2Q24, an acceleration from the 1.5% QoQ growth recorded in 1Q24. According to data from the Department of Statistics Malaysia (DOSM), the country's real GDP growth was robust on a monthly basis, posting increases of 6.2% YoY in April, 5.9% YoY in May, and 5.6% YoY in June. This sequential improvement underscores the continued momentum in economic recovery, driven by resilient domestic demand and a gradual recovery in external sectors.

SUPPLY SIDE ANALYSIS

The Services sector recorded a growth of +5.9% YoY in 2Q24 (1Q24: +4.8%). This performance was driven by a broad-based improvement across consumer- and business-related services, supported by strong domestic demand and favorable labor market conditions.

Manufacturing output grew by +4.7% YoY in 2Q24 (1Q24: +1.9%), driven by higher growth across export- and domestic-oriented industries. The sector benefited from the global tech upcycle and resilient domestic industrial activity.

Growth in the Agriculture sector accelerated to +7.2% YoY in 2Q24 (1Q24: +1.7%), supported by stronger production in the oil palm and fisheries subsectors, aided by favorable weather conditions.

The Mining sector expanded by +2.7% YoY in 2Q24 (1Q24: +5.7%), with lower growth primarily due to production disruptions in the oil and gas subsector during May.

Construction activity surged by +17.3% YoY in 2Q24 (1Q24: +11.9%), driven by heightened activities in the civil engineering and special trade subsectors, reflecting ongoing public infrastructure projects and recovery in private sector construction.

DEMAND SIDE ANALYSIS

In 2Q24, Malaysia witnessed stronger private sector expenditure, coupled with an improvement in net exports. Private consumption further increased to 6.0 per cent from 4.7 per cent in the first quarter of 2024.The performance was supported by the higher consumption on Food & non-alcoholic beverages, Transport and Restaurants and hotels. Private investment surged by 12% YoY in 2Q24 (1Q24: +9.2% YoY), driven by robust capacity expansion in the manufacturing and services sectors, reflecting strong business confidence and sustained growth prospects in these key areas.

Public consumption grew by 3.6% YoY in 2Q24, decelerating from the 7.3% YoY expansion recorded in 1Q24, primarily driven by increased spending on supplies and services. Meanwhile, public investment continued its positive trajectory with a 9.1% YoY increase, albeit moderating from the 11.5% YoY growth seen in the previous quarter, driven by further expansion in fixed assets spending by the Government and public corporations.

Exports and imports expanded by 8.4% YoY and 8.7% YoY, respectively, in 2Q24, reflecting a stronger global demand for Malaysian merchandise (1Q24: 5.2% YoY and 8.0% YoY, respectively). This uptick in trade activity led to a notable rebound in net exports, which grew by 3.4% YoY, reversing a sharp contraction of 24.5% YoY in the previous quarter. The recovery in net exports highlights the resilience of Malaysia's external sector, driven by increased demand across key trading partners and a broader recovery in global trade dynamics.

MONETARY OUTLOOK

Headline and core inflation averaged 1.8% YoY in 1H24, with both metrics ticking up to 1.9% YoY in 2Q24 (1Q24: 1.7% and 1.8% YoY, respectively). The rise was predominantly driven by higher inflation in housing and utilities, which accelerated to 3.1% YoY (1Q24: 2.6% YoY). The proportion of CPI items recording monthly price increases expanded to 49.4% during 2Q24 (1Q24: 44.2%; 2011-2019 2Q average: 43.9%), reflecting price adjustments linked to the festive season and government policy interventions. Inflation is projected to trend higher in 2H24, underpinned by the recent rationalisation of diesel subsidies. However, the impact is expected to be contained by mitigation measures aimed at cushioning businesses from rising costs. Going forward, the trajectory of inflation will be influenced by the spillover effects of further domestic policy adjustments on subsidies and price controls, in addition to global commodity price fluctuations and financial market dynamics. For 2024, we anticipate headline and core inflation to average within the forecasted ranges of 2.0%-3.5% and 2.0%-3.0% YoY, respectively, maintaining our in-house projection of 3% YoY for headline inflation, with risks skewed towards the lower bound of the official range, contingent on the timing of RON95 subsidy rationalisation.

BNM's neutral stance in the latest MPS, coupled with persistent of ongoing risks, strengthens our expectation that the OPR will remain unchanged at 3.00% throughout 2024. Since September 2023, BNM's forward guidance has consistently reflected a preference for maintaining current monetary settings, indicating no urgency for policy recalibration. At the prevailing OPR, the MPC assesses that the monetary policy stance remains supportive of economic activity while aligning with the current inflation and growth outlook. The MPC continues to closely monitor developments to refine its assessment of domestic inflation and growth dynamics, ensuring that monetary policy remains conducive to sustainable growth amid price stability. Moreover, ongoing government measures are likely to provide additional support to the MYR as the year progresses. We project the ringgit to trade within the 4.40- 4.45 range by year-end, factoring in the anticipated commencement of the US Federal Reserve's rate cut cycle next month

OVERALL OUTLOOK

BNM anticipates the global economy to remain resilient in 2H24, bolstered by robust labour markets and moderating inflation. The monetary policy easing in advanced economies is expected to provide additional short-to- medium-term growth support. While China's economy is projected to expand, the pace of growth will likely be tempered by subdued property market activity and weak consumer sentiment, partially offsetting fiscal stimulus efforts. Global trade is forecasted to recover further, underpinned by the accelerating global technology upcycle. However, the growth outlook remains vulnerable to downside risks, including potential escalations in geopolitical tensions, persistently high inflation, and an abrupt tightening of financial market conditions. On the upside, stronger-than-anticipated domestic demand in advanced economies could present an upside risk to global growth.

BNM projects that Malaysia's economic growth in 2H24 will be underpinned by robust investment activity, resilient household spending, and a stronger export performance. Investment momentum is expected to gain traction from the ongoing execution of multi-year projects across both private and public sectors, further bolstered by catalytic initiatives under national master plans and higher realisation of approved investments. Private consumption is anticipated to remain strong, supported by steady income growth and enhanced policy measures. Export growth will benefit from increased spillover effects from the global tech upcycle, alongside an improvement in tourist arrivals and spending. However, the growth outlook is subject to downside risks, including weaker-than-expected external demand, the potential escalation of geopolitical conflicts, and lower-than-anticipated commodity production. On the upside, greater spillover from the tech upcycle, a more robust recovery in tourism activities, and accelerated implementation of new and existing investment projects present upside risks to Malaysia’s economic outlook.

Following the robust performance in 2Q24, where GDP growth reached 5.9% YoY, the 1H24 GDP growth of 5.1% has already exceeded our full- year target of 4.7% for 2024. Given the sustained positive growth drivers expected to continue supporting economic momentum in 2H24, we anticipate that GDP could surpass the upper bound of the official target range. Consequently, we believe there is also a strong likelihood that the government will revise its official GDP growth forecast of 4.0%-5.0% for 2024 higher when Budget 2025 is tabled on 18 October.

Source: PublicInvest Research - 19 Aug 2024