• GDP moderated to 2.9% YoY in 2Q23

• Growth underpinned by domestic demand and tourism activities

• Growth in supply side was driven by services and construction sectors

• Current account surplus widened; FDI moderated

• The weak external demand is expected to weigh on near-term growth

Malaysia's economic growth hit the lowest in nearly two years in the second quarter due to sliding exports and a global slowdown. GDP expanded at a slower pace of 2.9% YoY (1Q23: +5.6%), which marks the lowest pace of growth since 3Q21 (-4.2%), bringing the 1H23 growth to 4.3% (1H22: +6.8%). Growth during the quarter was also affected by the high base effect. Despite slower growth on annual basis, seasonally adjusted GDP paced higher to gain 1.5% QoQ (1Q23: +0.9%). Correspondingly, the monthly economic performance grew marginally at 0.7% in April, picked up 5.6% in May and eased at 2.4% in June 2023.

Domestic demand remained the key driver of growth, supported by private consumption and investment. Meanwhile, investment activity was underpinned by capacity expansion, progress of multi-year projects and higher fixed asset spending by the government. Continued recovery in inbound tourism partially offset the slower goods export growth. The decline in net exports was due to weaker external demand amid global technology downcycle. On the supply side, the services and construction sectors continued to support growth. Meanwhile, production in the agriculture and mining sectors were affected by hot weather and plant maintenance.

Growth underpinned by domestic demand and tourism activities

On the demand side, domestic demand remained resilient, rose by 4.5% YoY (1Q23: +4.6%) supported by private consumption and investment.

Private consumption or household expenditure, which contributed 60.7% to GDP, grew further but at slower pace of 4.3% (1Q23: 5.9%) amid moderate expansion in spending on both necessities and discretionary spending. Higher consumption was recorded for housing, water, electricity, gas & other fuels (+6.3%) followed by communication (+7.1%) and transport (+6.1%). On quarter-on-quarter seasonally adjusted, private consumption posted an increase of 5.9% (1Q23: 2.0%). Further easing of inflationary pressure to 2.8% YoY (1Q23: 3.6%) during the quarter and the resilient labor market during the quarter which saw continued improvement in jobless rate to 3.4% underpinned the continued growth in private consumption. Public consumption increased by 3.8% (1Q23: -2.2%) given higher emoluments spending as well as spending on supplies and services. On a QoQ seasonally adjusted basis, public consumption rose by 4.0% (1Q23: -1.7%).

Meanwhile, gross fixed capital formation (GFCF) or investment in fixed assets increased to 5.5% (1Q23: +4.9%), thanks to both higher public and private investments amid further progress in construction projects and continued capacity expansion. GFCF by sector showed that both public and private sectors recorded increases in the second quarter of 2023 driven by capital expenditure on structures, and machinery & equipment (M&E), as well as improved Government’s fixed assets spending. Private investments rose by 5.1% (1Q23: +4.7%) and public investments stepped up to 7.9% (1Q23: +5.7%). On a QoQ seasonally adjusted basis, investments turned around to gain 4.7% (1Q23: -1.4%). Investment activities is expected to continue growing in 2H23, backed by the expansionary fiscal spending and easing cost pressures.

On the external front, both exports and imports declined following weaker global demand on merchandise exports and imports. Exports declined by 9.4% (1Q23: -3.3%), marking the second successive quarter of contractions. Imports also dropped sharply, falling at the fastest pace in 12 quarters at 9.7% (1Q23: -6.5%). However, exports of services increased mainly supported by international tourist arrivals. Due to the more challenging global environment, net exports declined by 3.7% as compared to an increase of 54.4% in the preceding quarter.

Source: BIMB Securities Research - 21 Aug 2023