Overview

Malaysia's economy grew by 5.3% YoY in 3Q24 (2Q24: 5.9%), supported by robust investment activity and sustained export recovery. Investment growth was led by higher expenditure on structures and machinery and equipment (M&E), while household spending remained resilient, bolstered by favourable labour market conditions and policy measures. Export performance was underpinned by strengthening external demand and positive effects from the global tech recovery. Faster growth in imports, driven by higher demand for capital and intermediate goods, reflected rising investment and trade activity. On the supply side, growth was broad-based, with the manufacturing sector benefitting from stronger performance in export-driven clusters. Maintenance activities in the mining sector partly offset the overall output.

On a seasonally adjusted basis, Malaysia's quarterly growth slowed to 1.8% in 3Q24, compared to 2.9% in 2Q24. Cumulatively, the economy expanded by 5.2% over the first three quarters of 2024, highlighting sustained recovery despite external uncertainties. Monthly real GDP data from the Department of Statistics Malaysia (DOSM) showed robust, albeit easing, growth trends, with the economy expanding by 7.4% YoY in July, 4.7% YoY in August, and 4.0% YoY in September.

Malaysia's economic growth in the coming quarters is projected to be anchored by strong investment activity and resilient household consumption, supported by exports' performance. Investment activity will likely gain traction from the ongoing execution of multi-year infrastructure projects in both the private and public sectors, alongside catalytic initiatives under national development plans and increased realisation of approved investments. Private consumption is expected to remain robust, driven by sustained income growth and the rollout of enhanced policy measures, further bolstering domestic demand. On the external front, exports are anticipated to benefit from positive spillovers from the global tech recovery, while the tourism sector is set to witness continued momentum with rising tourist arrivals and elevated spending levels.

However, the growth outlook remains subject to downside risks. Softer-than- expected external demand from key trading partners, escalating geopolitical tensions, protectionist policies, and subdued commodity production could weigh on Malaysia's economic momentum. That said, there are notable upside risks, including stronger-than-anticipated spillovers from the global tech recovery, a sharper rebound in tourism activity, and faster execution of both new and ongoing investment projects. These factors could provide additional support to Malaysia's near-term economic performance.

SUPPLY SIDE FACTORS

In 3Q24, supply-side growth remained broad-based, albeit with mixed performances across key sectors. The services sector expanded by 5.2% YoY (2Q24: 5.9%), driven by sustained momentum in consumer-related sub-sectors, though at a slightly moderated pace. Manufacturing growth accelerated to 5.6% YoY (2Q24: 4.7%), reflecting stronger output in export-oriented clusters, supported by improving external demand.

The agriculture sector rose modestly by 3.9% YoY (2Q24: 7.3%), weighed down by contractions in fisheries output, despite a moderate increase in oil palm production. Meanwhile, the mining sector contracted to -3.9% YoY (2Q24: +2.7%), due to lower oil and gas production amid maintenance activity.

Construction growth surged to 19.9% YoY (2Q24: 17.3%), underpinned by robust activity in non-residential, residential, and specialised trade sub-sectors, reflecting ongoing progress in multi-year infrastructure and private-sector projects.

DEMAND SIDE FACTORS

In 3Q24, demand-side growth exhibited mixed trends, with key drivers being robust investment activity and resilient public consumption, despite moderating private consumption. Private consumption growth eased to 4.8% YoY in 3Q24 (2Q24: 6.0%), reflecting softer spending momentum, although it remained supported by favourable labour market conditions and targeted policy measures.

Private investment accelerated significantly to 15.5% in 3Q24 YoY (2Q24: 12.0%), driven by heightened spending on structures and machinery and equipment, underscoring continued business confidence and capital expansion. Public investment also strengthened, posting a growth of 14.4% YoY in 3Q24 (2Q24: 9.1%), supported by increased fixed asset spending by the government and public corporations, reflecting progress on infrastructure projects.

Public consumption rose to 4.9% YoY in 3Q24 (2Q24: 3.6%), bolstered by higher emoluments and increased spending on supplies and services by the federal government. However, net exports contracted sharply to -8.8% YoY in 3Q24 (2Q24: 3.4%), as stronger intermediate and capital imports outweighed the growth in exports.

MONETARY OUTLOOK

In 3Q24, both headline and core inflation remained unchanged at 1.9% (2Q24: 1.9%). Notable price increases were observed for diesel (20.1% in 3Q24; 2Q24: 5.3%) and vehicle insurance (0.8% in 3Q24; 2Q24: -0.1%), while inflation in food and beverages eased to 1.6% in 3Q24 (2Q24: 1.9%), driven by slower price increases for food away from home, cereals, and fresh vegetables. The share of CPI items registering monthly price hikes declined to 38.9% (2Q24: 49.4%). Year-to-date, both headline and core inflation averaged 1.8%. Importantly, spillovers from higher diesel prices to overall inflation were limited, owing to effective policy interventions and enforcement measures that mitigated cost pass-through to retail prices.

In the November Monetary Policy Statement (MPS), BNM indicated that inflation is anticipated to remain manageable in 2025, underpinned by easing global cost conditions and the absence of significant domestic demand pressures. However, the inflation outlook hinges on the specifics of announced domestic policy measures. Upside risks to inflation include the spillover impact of policy changes, fluctuations in global commodity prices, and financial market dynamics. Key inflation drivers in 2025 may include the phased removal of RON95 petrol subsidies in mid-year, minimum wage adjustments, and an expanded SST scope. Additionally, we see potential for further subsidy rationalisation on essential goods, such as sugar, white rice and cooking oil, amplifying cost-push and demand-driven pressures on consumer prices. Other inflationary factors are likely to encompass civil servant salary hikes commencing in December 2024, mandatory EPF contributions for foreign employees and the multi-tier foreign worker levy.

Amid persistent downside risks to the growth outlook, we anticipate BNM will maintain a cautious stance into 2025, likely keeping the OPR unchanged at 3% throughout the year. This should help to narrow the negative interest rate differential with US rates. Following Donald Trump's presidential election victory, we foresee US economic policy in 2025 focusing on tariffs and tax adjustments. Consequently, we expect fewer Fed rate cuts in 2025, with the timing and specifics of Fed policy adjustments contingent upon the implementation of new tariff measures, adding a layer of uncertainty to the monetary landscape.

OVERALL OUTLOOK

The Malaysian economy is poised for sustained growth, underpinned by stable global growth and robust trade dynamics. BNM noted that global GDP is projected to grow at 3.2% YoY in 2024 and 2025, following an expansion of 3.3% in 2023, while global trade is anticipated to improve to 3.1% YoY in 2024 and 3.4% YoY in 2025, reflecting a gradual recovery in global economic activity. These external factors are expected to support Malaysia's export-oriented sectors.

Leading indicators signal continued economic improvement in the near term. The S&P PMI for Malaysia's new export orders edged into expansionary territory at 50.4 in October 2024, indicating strengthening external demand. Additionally, the DOSM Leading Index recorded a robust growth of 4.3% YoY (3MMA) as of August 2024, significantly exceeding its 2011-2019 average of 1.1%, pointing to sustained domestic economic momentum.

BNM highlighted that domestic investment activity will remain a key growth driver, supported by ongoing progress in multi-year projects across both private and public sectors. Catalytic initiatives under national development plans, coupled with increased realisation of approved investments, will further bolster investment momentum. These investments, accompanied by higher capital imports, are expected to enhance productive capacity and drive export growth. Household spending will continue to benefit from sustained employment and wage growth alongside targeted policy support, reinforcing domestic demand.

On the external front, Malaysia's export performance is anticipated to gain traction, underpinned by the global tech upcycle, robust demand for manufactured goods and commodities, and higher tourist spending. However, the growth outlook is not without challenges, with downside risks including softer-than-expected external demand, geopolitical tensions, protectionist trade policies, and weaker commodity production. Conversely, upside potential exists from stronger spillovers from the tech recovery, accelerated implementation of investment projects, and a more pronounced rebound in tourism activity. We project Malaysia's economy to sustain its growth momentum at 4.9% YoY in 2025. For 2024, the official full-year growth forecast has been revised upwards to 4.8%-5.3% YoY from the earlier estimate of 4%-5%, reflecting a more optimistic economic outlook. Our 2024 in-house estimate aligns with the upper range at 5.3%, revised from 4.7%.

Source: PublicInvest Research - 18 Nov 2024