• Marginal improvement in the 4Q23 GDP estimate was credited to expansions across all major sectors

• 2023 GDP undershoots target

• Economic growth momentum to improve in 2024

In its second release, Malaysia’s advance GDP estimate for 4Q23, which is based on the first two months (Oct-Nov) available monthly data, showed that economic activity improved marginally with real GDP growth inching up to 3.4% YoY (3Q23: 3.3%, 2Q23: 2.9%). For the full year, the economy expanded 3.8%, below our and the official projection of 4.0% (2022: 8.7%).

The marginal improvement in the 4Q23 GDP estimate was credited to expansions across all major sectors. This was led by services and mining & quarrying sectors.

The services sector spearheaded the economic performance in this quarter, with all other sectors experiencing positive growth. The services sector increased by 4.7% (3Q23: 5.0%) in 4Q23 backed by wholesale & retail trade, transport & storage and business services sub-sectors. Furthermore, food & beverages and accommodation sub-sectors, which are related to tourism activities, also expanded. The tourism recovery and robust labor market had help up consumer spending.

The mining & quarrying sector expanded by 3.7% in 4Q23 (3Q23: -0.1%) and the favourable performance of this sector was underpinned across all activities especially natural gas and crude oil & condensate.

Manufacturing sector turned around to gain marginally by 0.1% YoY (3Q23: - 0.1%) supported by domestic oriented production covering food related sectors, nonmetallic mineral products, basic metal, and fabricated metal products. The exportoriented segments including electrical & electronics, petroleum, chemical, rubber & plastic products showed narrower declines last quarter.

Construction sector growth slowed to 2.5% YoY (3Q23: 7.2%) after chalking up average growth of 6.9% in the first nine months of last year. This was due to moderation in civil engineering and residential buildings while specialized construction activities and non-residential saw declines.

The agriculture sector rose to 1.2% (3Q: 0.8%) resulting from improved production in the oil palm, other agriculture and livestock sub-sectors. The recovery in rubber subsectors also supported the expansion while fishing and forestry & logging subsectors recorded declines.

2023 GDP undershoots target

The advance 4Q23 GDP estimate of 3.4% brings 2023 full-year growth to 3.8% (2022: 8.7%), which is lower than our forecast and the Ministry of Finance (MOF)’s growth target of 4.0%. All sectors experienced positive growth, which contributed to this performance.

The services sector registered a growth of 5.4 % in 2023 following a higher growth of 10.9% in 2022. Additionally, Malaysia's economic activity is undergoing a recovery phase in 2023. The manufacturing sector recorded a marginal growth of 0.8% (2022: 8.1%) in 2023. The unfavorable performance of this sector was attributed to weaker external demand. Accordingly, Malaysia's trade performance also showed a declining trend in 2023, in tandem with a decrease of 8.0% (2022: 24.9%) in exports and a decrease of 6.4% (2022: 31.0%) in import activities. Meanwhile, the construction sector improved from 5.0% in 2022 to 5.8% in 2023. The mining & quarrying sector also rose at 1.0% (2022: 2.6%) and the agriculture sector recorded a marginal growth of 0.5% (2022: 0.1%).

Economic growth momentum to improve in 2024

The advance 4Q23 GDP estimate of 3.4% brings 2023 full-year growth to 3.8%, which is lower than our forecast of 4.0%. For 2024, we expect a higher growth of 4.7%. Malaysia’s resilient private consumption, a firmer labor market and global trade diversion are expected to be supportive of a slightly stronger economic growth momentum in 2024. Stabilisation of monetary policy in major countries, a stronger recovery in China, and supportive global commodity prices are expected to boost Malaysia’s external front in 2024. The rebound in global technology cycle, coupled with continued resilience in US and ASEAN economies are expected to provide some supports to the export-oriented segments, in tandem with higher external demand. However, a steeper-than-expected slowdown in trade would be the primary growth risk. On inflation, our base case headline inflation forecast is anticipated to be around 2.7% in 2024 as inflation pressures continue to ease from a high base. Nonetheless, we foresee upside risks to our 2024 inflation forecasts, given the ripple effects of the anticipated rollout of the targeted subsidies mechanism and elevated commodity prices amid geopolitical tensions. The timing and extent of shifts from broad-based to targeted subsidies remain unknown at this stage.

Meanwhile, the cumulative effect from the increase in service tax rate from 6% to 8% (effective March 1, 2024), the introduction of high-value goods tax (will be imposed starting May 1, 2024), rollbacks in petrol/diesel subsidies (2H24), hikes in utility tariffs and the recent introduction of the low-value goods tax effective 1 Jan 2024 will only put added pressure on overall consumer disposable income. Still, the services sector is expected to continue to show resilience as tourism and consumer related sectors are expected to increase, in line with continued expansion of consumer spending as well as improved tourism momentum and favorable labor market conditions.

The external backdrop in 2024 is likely to remain as challenging as in 2023. Export demand will be buffeted by numerous factors including slower global growth, fading commodity tailwinds, and persistent geopolitical tensions. The bottoming of the electronics export downcycle may provide much-needed support to exports.

Source: BIMB Securities Research - 22 Jan 2024