• CSI retracted while BCI surged
   
• BCI signals strong confidence among local manufacturers
   
• Domestic policy implementation in 2H2024 is expected to impact sentiment in the upcoming quarter

Overview

In the first quarter of 2024, the Consumer Sentiments Index (CSI) demonstrated a downward trend, retracted slightly from its recovery in 3Q23. The 1Q24 registered at 87.1, marking a slight decline from the fourth quarter score of 89.4. CSI experienced a drop in 1Q24, contrary with an increase in the number of employed persons (1Q24: 16.40mn; 4Q23: 16.35mn). Yet, inflation for first quarter of 2024 registered a 1.7% increase (4Q 2023: 1.6%). Inflation in 2024 is expected to remain moderate, reflecting stable demand and contained cost pressures. The year's outlook depends on domestic policies on subsidies and price controls, along with global commodity prices and financial market developments. Despite the slight fall in CSI, sentiment was further backed by a better job market, as indicated by the labor force participation rate reaching 70.2% (4Q 2023: 70.1%). We anticipate a stable labor market throughout 2024, driven by continued employment growth stemming from economic expansion, recovery in manufacturing, heightened investments, infrastructure spending, and an upswing in tourism.

Consumer sentiment has cooled recently, with indicators showing a slight slip in both current and expected finances. Persistent concerns about inflation further dampen confidence, leading many to hold back on their spending plans. This cautious approach reflects a broader uncertainty in the economic landscape, influencing consumer behaviour and expectations. Economy Minister Rafizi Ramli has reiterated Malaysia's commitment to reducing petrol subsidies this year as part of efforts to reduce the fiscal deficit. This ongoing subsidy rationalization (SRI), coupled with the implementation of the progressive wage mechanism, is anticipated to have an impact on inflation in the latter half of the year.

Business Conditions Index (BCI) indicated robust confidence levels among local manufacturers. In 1Q24, BCI surged by 5.3 points compared to the previous quarter, reaching a total of 94.3 points. Businesses remain optimistic about the outlook for the next three months. Despite challenges and headwinds, a broader recovery is expected in the second half of 2024. This recovery will be driven by anticipated improvements in the unemployment rate and ongoing growth in distributive trade sales. Additionally, increasing tourist arrivals and spending will provide a further boost to economic activity. Regardless of the prolonged contraction over the last 20 months, Malaysia's manufacturing Purchasing Managers' Index (PMI) readings are approaching the 50.0 points mark (Apr: 49.0; Mar: 48.4), indicating a potential sectoral recovery on the horizon.

Short-term sentiment is expected to stay cautious as persistent challenges may take time to ease. SRI implementation could pose financial strains on businesses, adding pressure to firms. Despite these hurdles, the outlook is poised for improvement, buoyed by ongoing reforms, progress, and the Unity Government's determination.

Outlook

Several factors are expected to constrain the composite index's growth, including inflation, currency volatility, and global economic slowdown. Rising food costs and increased household spending are likely to slow consumer spending, worsened by new taxes. Government efforts to address these challenges and improve the business environment could cushion these impacts, especially with anticipated manufacturing sector recovery in the latter half of 2024, potentially boosting the Business Conditions Index (BCI).

Source: BIMB Securities Research - 15 May 2024