• We Forecast GDP Growth of 3.3% YoY in 4Q23 
   
• 2023 Full Year Growth of 3.7%
   
• 2023 GDP undershoots target

• Economic growth momentum to improve in 2024

• 2024 GDP growth to expand at 4.7%

We estimated 4Q2023 GDP growth at +3.3% YoY (3Q2023: +3.3% YoY), just marginally lower than the advance estimate of +3.4% YoY released on 19 Jan 2024, bringing the whole 2023 GDP to 3.7%. We are sanguine about Malaysia’s growth prospects in 2024, where we expect GDP growth to come in at 4.7%.

Malaysia's Industrial Production Index (IPI) for 4Q 2023 improved by 1.0% YoY, reversing a contraction of -0.05% in the previous quarter. This positive growth was attributable to an incline of +4.3% (3Q2023: -0.4% YoY) in mining and +4.9% (3Q2023: +1.9% YoY) in electricity which offset a downfall of -0.2% (3Q2023: -0.1% YoY) in manufacturing. Manufacturing production stayed sluggish given further contraction in export-oriented industries (4Q2023: -2.8% YoY; 3Q2023: -2.4%) amid growth in domestic-oriented industries (4Q2023: +4.2% YoY; 3Q2023: +5.8%). Malaysia’s full-year 2023 IPI averaged 0.9%, coming off from 6.7% in the preceding year. This positive growth was driven by an increase of 0.7% in manufacturing, 2.5% in electricity, and 0.8% in mining.

Last quarter also saw moderations in Index of Services and Value of Construction Works. Volume index of Services grew 4.1% YoY (3Q2023: +5.1%), bringing the annual performance for 2023 to an increase of 5.6% compared to the year 2022. The performance of volume index of services for 4Q2023 was driven by the increase in Wholesale & Retail Trade, Food & Beverages and Accommodation segment which grew 4.2% YoY (3Q23: 5.1%). This was followed by Information & Communication and Transportation & Storage segment (4Q23: 6.6%; 3Q23: 6.9%), Other Services segment (4Q23: 7.0%; 3Q23: 8.7%), and Business Services and Finance segment (4Q23: 1.0%; 3Q23: 3.0%).

The Construction work done value reached RM34.1bn in 4Q2023, registering an increase of 6.8% YoY (3Q2023: +9.6% YoY). The growth in 4Q2023 was reinforced by the stronger expansion in the Civil engineering sub-sector, which surged by 18.0% (3Q2023: 17.1%) while the Residential buildings and Special trade activities expanded at a slower pace of 2.3% (3Q2023: 7.9%) and 0.3% (3Q2023: 16.2%) respectively. In contrast, the Non-residential buildings sub-sector experienced a decline of 1.9% (3Q2023: -0.7%). The performance of the Construction work done in 2023 demonstrated continuous positive momentum at 8.4% after turning around in 2022 with 8.8% growth.

We expect GDP growth to be at 3.3% in 4Q2023, translating into a full-year growth of 3.7%, which fall short of the government’s expectation of about 4.0%. A reflection of further improvement in the labour market, the unemployment rate has returned to its prepandemic level (4Q2023: 3.3% vs. 3Q2023: 3.4%), a level that was last seen in 3Q2019. On top of that, we believe that a stable Overnight Policy Rate (OPR) of 3.00% since 2Q2023 may have supported consumer spending given the still double-digit growth in the disbursement of credit card (4Q2023: 11.1% vs. 3Q2023: 13.4%) during the quarter. Consumer spending could receive further support from the government’s e-wallet assistance and the boost in tourist arrivals especially after the visa-free entry to citizens from China, India and several Middle Eastern countries beginning December 1, 2023.

Faltering external demand to drag growth, as exports nosedived 6.9% in 4Q2023, following a steeper 15.2% drop in 3Q2023. The sharp 45.9% plunge in the trade balance in 4Q2023 (3Q2023: -9.3%) is likely to put a significant brake on net exports. Owing to the still-subdued external demand, factory output in Malaysia continued to fall, with the Industrial Production Index (IPI) down by 0.2% in 4Q2023 (3Q2023: -0.1%). The manufacturing Purchasing Managers' Index (PMI) has also been in the contraction zone for 17 months, signalling ongoing weakness in the sector. Nevertheless, trade deficits with major trading partners narrowed in 4Q2024, indicating a potential turnaround. Exports to the U.S. (4Q2023: -3.5% vs. 3Q2023: -6.0%), European Union (4Q2023: -11.8% vs. 3Q2023: -6.3%), and China (4Q2023: -5.7% vs. 3Q2023: -11.5%) showed improvement, declining at a slower pace than in 3Q2023.

After a bumpy 2023, we expect Malaysia’s economy to hold up well in 2024, expanding at a faster pace at 4.7%, aligning with the official projection range of 4.0% and 5.0%. Growth in 2024 will remain supported by still-robust domestic demand, although at a slightly moderated pace amid the restrictive fiscal policy including the 2.0% Service Tax rate hike from 6.0% to 8.0% and subsidy rationalisation. With the global semiconductor downcycle seemingly coming to an end, the net exports, which have been the main drag to growth in 2023, are bound to improve and even become a positive contributor in the coming quarters. Nevertheless, there are downside risks to our projections, and they mainly stem from external developments. Global growth could slow more sharply than expected, and the intensifying geopolitical tensions and the resulting fragmentation could amplify the slowdown.

Source: BIMB Securities Research - 15 Feb 2024