THE Malaysian economy is starting 2024 on a positive direction, albeit a mixed performance. The growth outlook remains subject to downside risks.

Global leading and forward indicators suggest continued global growth.

The International Monetary Fund (IMF) raised its forecast for global growth to 3.1% (from 2.9% previously) in 2024. However, it is historically low, below the average global gross domestic product (GDP) of 3.8% per year in 2000-2019.

Some central banks have begun to lower interest rates as global inflation has fallen.

Global trade, which had tumbled to 0.4% in 2023, will regain growth traction to increase by 2.9%-3.4% in 2024 though the below average growth of 3.7% per year in 2011-2019.

In Bank Negara’s “Economic and Monetary Review Report”, it expects higher economic growth of 4%-5% (mid-point estimate at 4.5%) in 2024 (3.7% in 2023), in line with the Socio-Economic Research Centre’s (SERC) estimate of 4.5%. This will be driven by a recovery in exports and resilient domestic expenditure.

What are the business expectations?

The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Malaysia Business and Economic Conditions Survey indicated that higher respondents (40.6%) expect a “better” economic outlook in the second-half of 2024 (2H24) compared to 28.2% in 1H24.

Most sectors are cautiously optimistic about their business conditions in 2024, especially in the second half of the year.

Our tracking of high frequency indicators provides a good headstart for the year, but we must keep vigilant on both external and domestic risks, which are roughly balanced.

External risks may come from weaker-than-expected external demand, larger declines in commodity production and the escalation of geopolitical conflicts.

Meanwhile, domestic risks to growth could come from weaker domestic consumption and slower implementation of existing and new projects.

> Malaysia’s leading economic index, which predicts economic trends for an average of four to six months ahead, bounced back to a positive trajectory of 0.3% year-on-year (y-o-y) in December 2023, the first positive growth after nine consecutive months of declines.

> Industrial production rebounded by 4.3% y-o-y in January (0.03% fall in December 2023). It is encouraging that growth in the manufacturing sector has turned around to increase by 3.7% in January 2024 (1.4% fall in December 2023).

The domestic-oriented industries expanded by 8%, while export-oriented industries reverted to a 1.6% growth after being stuck in negative territory for seven consecutive months. Sustained growth in the electricity and mining sectors.

> Sales of passenger vehicles jumped 33% y-o-y to 59,394 units in January 2024, due to the year-end rush of deliveries and bargains, while that of commercial vehicles climbed 9% to 6,105 units.

> After contracting since June 2023, manufacturing sales value rebounded to 3.2% y-o-y in January 2024, bolstered by the strong growth of 15.8% in the transport equipment and other manufactures sub-sector, food, beverages and tobacco products (11.4%), non-metallic mineral products, basic metal and fabricated metal products sub-sector (9.6%).

> Manufacturing sales value of wholesale and retail trade grew by 5.4% y-o-y to RM142.4bil in January 2024, contributed by all sub-sectors, namely, motor vehicles (16%), wholesale trade (5.5%) and retail trade (2.6%).

> Exports, which had been contracting at a much slower pace in 2H23 (6.9% in the third quarter or 3Q, 15.2% in 3Q) rebounded to an 8.7% y-o-y growth in January (8% fall in 2023), partly due to the front-loading shipment of exports ahead of the shorter working days in February.

This partly explained for causing exports to decline marginally by 0.8% in February.

We maintain a positive export outlook for this year, an estimated 4% growth (8% fall in 2023) compared to Bank Negara’s estimates of 5%, mainly driven by a recovery in demand of electronics and electrical products as well as firming commodity and crude oil prices.

Bank Negara estimated the crude palm oil price at RM4,200 to RM4,400 per tonne in 2024 , while Brent crude oil at US$80-US$90 per barrel in 2024 vs US$83 per barrel in 2023.

> Imports serve as a leading indicator of the economy in terms of production, investment and consumption. Imports grew by 13.9% in January-February.

The expansion of intermediate (14.3% in February, 21.3% in January) and capital goods (30.3% in February; 41.5% in January), presage continued growth in production, exports and investment activities.

Meanwhile, import of consumption goods remained strong (19.7% in February; 25.3% in January) on sustaining household consumption.

While the recovery in external demand will support the economy, can consumer spending (60.8% of total GDP) continue to hold firm? We take a cautious view on private consumption growth (estimated 4.6% in 2024 vs 4.7% in 2023 and 7.1% per year in 2011-2019) compared to Bank Negara’s 5.7%.

Consumers will be more cautious on discretionary spending. The dampening factors are continued high cost of living, increases in the prices of food and beverages, a higher service tax rate for selected categories and new scope of tax, the impact of the weakening ringgit, as well as the anticipated implementation of the targeted fuel subsidy rationalisation.

Nevertheless, stable employment growth (estimated jobless rate at 3.3% in 2024) and moderate wage growth will support consumer spending.

It was observed that real wage growth (nominal wages adjusted for inflation) of the manufacturing and services sectors have been moderating in recent quarters to 1.3% and 1.7% in 4Q23, respectively (2.4% and 6.7% respectively in 2Q22).

Additionally, continued cash assistance (Sumbangan Tunai Rahmah) of RM10bil for benefitting close to nine million recipients will mitigate the targeted households and individuals against high cost of living.

Catalysts for private investment growth have to be sustained. Bank Negara expects private investment to expand higher by 6.1% in 2024 (4.6% in 2023; 8.8% per year in 2011-2019) compared to SERC’s 5.5%.

The ongoing implementation of multi-year infrastructure projects and continued capacity expansions as well as the realisation of some approved investments in previous years (2021-2022) are expected to underpin growth.

Of significance, the progress of approved projects in recent years is well on track, with 74% of manufacturing projects approved from 2021 to 2023 being implemented or completed.

We caution that increasing business operating costs and high cost of raw materials would dampen the business spending by small and medium enterprises (SMEs).

Headline inflation has been moderating since April 2023 to 1.5% in December 2023, bringing to an average of 2.5% in 2023. Core inflation also trended lower, albeit at a slower pace to average 3% in 2023 (3% in 2022).

In January 2024, headline inflation increased by 1.5% for three consecutive months while core inflation stood at 1.8%.

Inflation is much “stickier” in services-oriented businesses, particularly because of the heavier labour cost and other operating costs. These include restaurant and accommodation, health as well as personal care, social protection and miscellaneous price inflation.

Bank Negara remains cautious about the inflation outlook in 2024 (estimated 2%-3.5% vs SERC’s 2.8%-3.5%) on the anticipated policy changes in domestic fuel subsidy rationalisation, as well as the development in exchange rates and global commodity market.

Direct exchange rate pass-through to imports is evident, whereby 40% of exchange rate depreciation is translated to overall import prices.

Bank Negara estimated that a change in 5% in the ringgit/US dollar will result in core inflation to increase by 0.2 percentage points over the year.

It cautions that the impact could be larger amid prolonged depreciation, particularly for key necessities with high import content such as food (7%) and transportation (5%). The share of import content in domestic consumption is approximately 26%.

We support the central bank’s short-term efforts through moral suasion requesting the exporters, corporates, GLCs and GLICs to repatriate their realised income and export process abroad and convert into the ringgit, and do not hold foreign exchange above normal to help stabilise the ringgit.

The government must remain committed towards undertaking structural institutional and economic reforms to strengthen its fiscal position and contain debt level, to boost the nation’s productivity and competitiveness, enhance better investment climate to retain domestic investment and attract more high-quality foreign direct investment, improve education outcomes, enhance manpower skillsets, accelerate the climate transition, and make growth more inclusive, ensuring access to economic opportunities for all.

The bottom line is the ringgit exchange rate is one of the most important determinants of a country’s relative level of economic health, our own people and investors’ confidence, relative competitiveness in the terms of trade, as well as the capital movements in terms of real rate of return on investment.

While the ringgit exchange rate is determined by numerous complex external and domestic factors, the government has to show its credibility in delivering the promised reforms, offer compelling economic and investment proposition as well as strong corporate earnings prospects to lure more foreign investors and domestic investors investing in domestic asset classes.

Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.

https://www.thestar.com.my/business/business-news/2024/03/25/positive-signalsamid-downside-risks