Key Highlights:

Malaysia’s modest 2Q23 GDP is aligned with our expectations. A continued moderation in the growth trend is expected in the third quarter. This is despite gradual improvements in economic indicators month to date (such as CPO production and labour market) as these advancements are unable to offset the influence of a high base effect. Malaysia demonstrated a substantial 14.1% YoY GDP growth in the third quarter of the previous year. Moreover, the manufacturing sector faces subdued demand for its goods, a fact mirrored by the weak Purchasing Managers Index (PMI) reading. The prolonged contraction in exports over a span of five months also highlights weak external demand. We maintain a decent GDP projection of 4.2% YoY, which is at the lower range of the government and BNM’s forecast. We’ll continue to monitor the situation closely, with a readiness to adjust our growth trajectory should stronger downside risks persist both from the external and domestic side.

As China navigates its challenges, Malaysia finds itself in a position where the outcomes are closely tied to China's economic performance. The hope for China's recovery and improvement holds significance for Malaysia's economic stability. Its resurgence will lead to a renewed demand for Malaysian exports, as China is a crucial trading partner for Malaysia. Additionally, increased economic activity in China could stimulate international investments and trade, positively influencing Malaysia's economic prospects. By pursuing diversification, Malaysia aims to create a more resilient economy that can weather challenges even if its reliance on specific markets like China diminishes. Recently, the Malaysian government rolled out its fourth industrial master plan, which aims to revitalise the country's manufacturing sector and increase its valueadded turnaround to RM587.5bn by 2030.

Weak prospect from external demand; Hoping it to recover soon

• The latest indications regarding external demand strongly suggest that Malaysia will continue to feel the effects of the ongoing global economic slowdown this year. A major concern centers on the deceleration of growth from China, which was initially anticipated to be a driving force in 2023. Back in June, several prominent banks, such as Nomura, UBS, Standard Chartered, Bank of America and JPMorgan revised lower their 2023 growth projections for China's GDP (averagely about 0.475ppts lower), following May’s data that indicated a stumbling post-COVID recovery in the world's second-largest economy. To note, the government has set a modest GDP growth target of around 5% for this year after badly missing its 2022 goal.
• Although there was a rise in China’s 2Q23 GDP growth during the second quarter of this year (6.3% YoY Vs 1Q23’s 4.5% YoY), it was attributed to a favourable base effect. The third quarter's data has been predominantly losing more momentum (consensus 3Q23 GDP forecast: 4.3% YoY). This comes amid challenges within the property sector, waning sentiment, heightened trade tensions with Western nations, and weakened external demand. Adding to these concerns, indicators for July—including industrial production, retail sales, fixed investment, credit provisioning, and exports—all fell short of market expectations. Concurrently, the country experienced deflation in the same month, signaling subdued domestic demand, alongside a decline in house prices and property investments.
• The latest’s China economic data showed that industrial output expanded by only 3.7% YoY in July (June: 4.4% YoY). The weakening was driven by decelerations in manufacturing and mining sectors. Moreover, nominal fixed investment rose at a softer pace of 3.4% YoY in January–July (January–June: 3.8% YoY), the worst result since December 2020. Primary, secondary and tertiary investment momentum eased, while a contraction in private investment was only partly offset by growth in government investment. Finally, retail sales expanded 2.5% YoY in July, down from 3.1% YoY in June. Sales of building materials and home appliances fell sharply, likely linked to weak housing demand. The retail data likely overplayed the weakness of consumer spending, as it does not account for domestic tourism, which has surged in recent months. The readings for industrial output, investment and retail sales all notably undershot market expectations, and spurred monetary easing by the Central Bank on the day of their release.

• In August, Country Garden, one of China's major property developers, encountered a situation where interest payments on its bonds were not met. Additionally, the company revealed substantial losses of up to USD7.6bn for the first half of the year. Concurrently, a key financial institution also defaulted on interest payments, giving rise to concerns of potential contagion within the USD3tn shadow banking sector.

• In response to mounting apprehensions regarding the growth trajectory, China has recently undertaken a series of commitments aimed at rejuvenating the economic recovery and enhancing the business environment. A slew of pronouncements from the government and the Communist Party, starting from July, have predominantly centered on stimulating increased expenditure on items such as consumer goods and automobiles. This is to entice private enterprises to expand their investments, and facilitating easier access to funding for businesses.

• China’s central bank has also reduced the amount of money that financial institutions must set aside in reserve – freeing up more money to be loaned out as Beijing ramps up efforts to inject more life into the ailing economy. The reserve requirement ratio (RRR) for foreign-exchange deposits will be cut from 6% to 4% effective September 15th. On top of that, the lenders also lowered their mortgage rates. This included Industrial and Commercial Bank of China, China Construction Bank Corp and Agricultural Bank of China, which cut their deposit rates by between 5 and 25 basis points. Several midsized banks also announced they will start cutting interest rates on a range of deposits by 10-25 basis points.

Source: TA Research - 4 Sept 2023