Slowest growth in recent two years – Malaysia GDP recorded its 2Q23 Real GDP that grew 2.9% yoy (vs 1Q23: 5.6% yoy) and GDP increased by 1.5% qoq (1Q23: +0.9% qoq). The +2.9% yoy performance came below market expectation of 3.3% mainly due to the high base effect from last year coupled with the weaker external demand. Private consumption remained as the key driver for growth (+4.3% yoy) supported by continued expansion of household spending with improving labour market. Meanwhile in the supply side, the performance was led by Services, and Construction sectors. After 2Q23, the Malaysian economy grew 4.2% yoy in 1H23 as compared to +6.8% yoy in 1H22.  

Supply side growth weakening  

Service sector grew at 4.7% yoy in 2Q23 (vs 1Q23: +7.3% yoy and +2.7% qoq (vs 1Q23 +1.8% qoq). The growth of the segment was mainly driven by wholesale & retail trade (+4.7% yoy) and Transportation & storage sub-sector (+13.5% yoy).  

The Manufacturing sector further eased its growth to merely +0.1% yoy in 2Q23 compared to +3.2% yoy in 1Q23. In terms of seasonally adjustment, the sector posted +0.6% qoq (vs 1Q23: +0.5% qoq). We opine that the easing of growth in the sector is mainly attributed to the weakening demand of external export especially in E&E products. The growth in 2Q23 was supported by Nonmetallic mineral products, basic metals and fabricated metal products at +5.4% yoy, Beverages & tabacco product which grew at +8.8% yoy and Vegetables and animal oils & fats and food processing which increased +2.1% yoy. However, the growth has partial offset by a decline in the sub-segment of Electrical, electronic and optical products which posted -1.5% yoy from +3.8% yoy in the previous quarter in line with the global E&E slowdown.  

The Construction Sector further eased to +6.2% yoy in 2Q23 from +7.4% yoy in 1Q23. The sector was mainly boost by the Civil engineering sub-sector which registered a double-digit growth of +10% yoy (vs 1Q23: +15.9% yoy). The sector was also boosted by some large infrastructure projects are progressing such like ECRL and LRT 3 as Specialised construction activities grew by +6.4% yoy (1Q23: +8.7% yoy). Meanwhile, Non-residential buildings grew +2.3% yoy and Residential buildings added +6.1% yoy.  

The Mining and Quarrying sector has fallen into the red at -2.3% yoy from +2.4% yoy in 1Q23. After being seasonally adjusted, the sector’s performance was -2.7% qoq (vs 1Q23 : -3.2% qoq). The weaker performance of the sector was attributed to decrease in Natural gas (-3.6% yoy compared to 1Q23: +0.6% yoy) and Crude oil and condensate (-1.5% yoy compared to 1Q23: +4% yoy).  

The Agriculture sector also declined 1.1% yoy from a growth of +1% in previous quarter. In terms of seasonally adjustment, the sector posted -3.6% yoy from -2.5% in the previous quarter. The sluggish performance of the sector is attributed to a drop in Oil palm sub-sector at -6.9% yoy (vs 1Q23: +3.4%) followed by Forestry & logging (-11.4% yoy) and Fishing (-1.5% yoy). However, the contraction of the sector was cushioned by Livestock (+0.3% yoy), Rubber (+3.7% yoy) and Other Agriculture (+6.6% yoy) sub-sectors.  

Demand Side. Final consumption sector further eased its growth to +4.2% yoy for 2Q23 from +4.5% yoy in 1Q23. Private consumption sustained its growth by posting +4.3% yoy (1Q23: +5.9% yoy). After being seasonally adjusted, Private consumption further expanded to +5.9% qoq from +2% qoq last quarter. The better performance was mainly supported by higher expenditure on Housing, water, electricity, gas & other fuels, Communication and Transport.  

Government consumption returned to the black with a growth of +3.8% yoy from -2.2% yoy in the previous quarter thanks to lower spending of Supplies and services. In terms of seasonally adjustment, government consumption rebounded to +4% qoq (vs 1Q23: -1.7% qoq).

Gross Fixed Capital Formation (GFCF) expanded to +5.5% yoy from +4.9% in 1Q23. After being seasonally adjusted, GFCG increased 4.7% qoq compared to -1.4% qoq in last quarter. The better performance was mainly attributed to Structure and Machinery & equipment sub-segments which recorded +6% yoy (vs +7.5% yoy in 1Q23) and +4.4% yoy from +2.6% yoy in 1Q23 respectively. Private investment (which constitutes 83% of total GFCF) furthered expand by +5.1% yoy from +4.7% yoy in the preceding quarter while Public investment grew 7.9% yoy (vs 1Q23: +5.7% yoy).  

Sluggish External trade. Malaysia’s external has decelerated in line with the global economic slowdown. Exports declined 9.4% yoy (1Q23: -3.3% yoy) but increased +1.2% qoq (1Q23: -8.9% qoq) mainly attributed to the weakening global demand and economic slowdown in our main trading partner China. Imports plummeted 9.7% yoy in 2Q23 (vs 1Q23: -6.5%) which reflects the moderation in domestic demand and slower pace of inventory build-up. However, despite the challenging external headwinds, Malaysia could mitigate the impact of economic slowdown supported by the robust economies of Southeast Asia, alongside diversified products and trade partners.  

Economic growth momentum slowing down.  

The 2Q23 has seen a slower-than-expected economic growth, in line with global economic slowdown and challenging external trade conditions especially the slower-than-expected economy in China. However, the continued recovery in inbound tourism has partially cushioned the slower growth from external trade. Moving forward, we anticipate that the GDP growth in the second half of 2023 will be continue to post moderate growth mainly hampered by cautious consumer spending, higher borrowing costs, and rising living expenses. To reiterate, we expect 2023 GDP to still show healthy growth but with a more moderate pace. We are revising downwards our full-year 2023 GDP forecast to +3.2% yoy from +4.1% yoy. This adjustment follows the 2Q23 performance, which fell short of our expectations, indicating that the growth momentum is slowing down earlier than initially anticipated.  

Headline inflation started to moderate. We expect inflation to continue trending lower in 2H2023 underpinned by the easing cost and commodities environment in tandem with the slower consumer spending. We revised our 2023 CPI forecast to +2.6% yoy from +2.8% yoy previously after 2Q23 Production Price Index came in lower than our expectation. The forecast of full year FY23 headline inflation +2.6 yoy has shown moderation from +3.4% yoy in 2022.  

OPR rate. The central bank has kept its Overnight Policy Rate (OPR) unchanged at 3% last month. The moderating of economic growth might quash the appetite of BNM for any further hikes on the interest rate. However, we still anticipate that there will be another 25bps hike in OPR by BNM, which will bring the terminal rate to 3.25% in FY23 as Malaysia is facing some outflow pressure from local currency. This move is aimed at strengthening the local currency and safeguarding against the outflow of foreign funds.

Source: JF Apex Securities Research - 22 Aug 2023