Highlights

• Malaysia's real Gross Domestic Product (GDP) increased by 3.3% YoY in the third quarter of 2023. The growth came above our revised expectations during the GDP preview and the 3.2% median forecast of analysts polled by Bloomberg.

• By absolute value, the overall output was RM397.58bn, higher than 2Q23's RM377.95bn and 3Q22's RM384.88bn. On a quarter-on-quarter, non-seasonally adjusted basis, it experienced a 5.2% increase, a notable improvement from the previous -0.8% contraction.

• Trend-wise, the monthly economic performance recorded a faster growth of 4.2% YoY in July 2023, before slowing down at 3.2% YoY in August and moderating further to 2.5% YoY in September (Apr23: 0.7% YoY; May23: 5.6% YoY; Jun23: 2.4% YoY).

• On another note, the nominal GDP increased by 1.2% YoY to RM462.68bn in 3Q23 (2Q23: - 1.2% YoY). To observe how overall economic growth relates to price level changes, we also assessed the GDP Deflator, which represents the change in prices for all goods and services produced in the country. Namely, the GDP deflator declined by 2.0% YoY in 3Q23, compared with -4.0% YoY in the previous quarter. For comparison, the Consumer Price Index moderated by 2.0% YoY during the quarter (2Q23: 2.8% YoY) while core inflation moderated further to 2.5% (2Q23: 3.4%).

• Despite the moderation, key economic sectors continued to expand in the second quarter of 2023. The performance on the supply side was driven by the Services, Construction and Agriculture sectors. On the demand side, Private Final Consumption Expenditure and Gross Fixed Capital Formation continued to propel the overall economy.

Our View/Outlook

• Taking into account of another moderate GDP performance in the third quarter, the Malaysian economy expanded 3.9% YoY in the first nine month of this year. Still, this gain was mainly due to the increase in Construction (9M23: 7.0% YoY), Services (9M23: 5.7% YoY) and Manufacturing (9M23: 1.1% YoY) sectors. However, the Agriculture and Mining sectors charted a modest growth of 0.3% and 0.04% YoY, respectively. In addition, Personal Spending (9M23: 4.9% YoY) and Gross Fixed Capital Formation (9M23: 5.2% YoY) in the demand side has contributed positively to the overall GDP during the period.

• We believe that the economy is expected to chart a better growth in the final quarter, buoyed by the resilience of domestic demand as the labour market remains robust. Notably, the country has witnessed a progressive decline in the unemployment rate, reaching a low of 3.4% in 2Q23, from 3.5% in the previous two quarters. The positive trend in the labour market play a crucial role in strengthening Malaysia's economic stability. These favourable developments underscore the resilience of domestic demand, creating a conducive atmosphere for a consistent economic growth and lasting prosperity.

• The anticipated economic upswing is poised to receive an additional boost from the ongoing resurgence in tourist activity. The government has set an ambitious target of welcoming 16.1mn tourists this year, projecting a substantial tourism revenue exceeding RM49bn. According to the latest update from Datuk Seri Tiong King Sing, the Minister of Tourism, Arts, and Culture, Malaysia has already seen 12.17mn tourist arrivals as of the third week of August this year. As we approach December 2023, the Ministry remains optimistic about sustaining this growth trajectory, aiming to surpass the set target. Bank Negara Malaysia (BNM) also stating encouraging signs, indicating a significant return of Chinese tourists to Malaysia despite global challenges and a slowdown in China's economy. While specific data remains undisclosed, BNM assures that this information will be released shortly. Malaysia is wellpositioned for further enhancement, with opportunities for improvement ranging from government investments in marketing to the current advantage of a weaker ringgit. Abundant untapped potential locations, including picturesque beaches, stand as catalysts for continued growth.

• Nevertheless, China's sluggish economic recovery, coupled with the escalating risk of a broader global economic downturn, is poised to maintain pressure on export-oriented industries. This is expected to have a more pronounced impact on both the manufacturing and services sectors than initially projected. Moreover, the overarching risks to global growth persistently lean towards the downside, with major economies contemplating additional interest rate hikes to counteract persistently high inflation. This move is likely to further tighten financial conditions. Despite positive signals from China, such as beating expectations in October for indicators like industrial output and retail sales growth, a closer examination reveals significant areas of weakness in the underlying economic landscape. The ongoing crisis in the property sector continues to impede a comprehensive recovery. China, as the world's second-largest economy, grapples with challenges stemming from the distressed housing market, local government debt risks, slow global growth, and geopolitical tensions, all of which have hindered momentum. Although a series of policy support measures have yielded modest benefits, authorities now face heightened pressure to implement additional stimulus measures.

• At present, we maintain our 4.6% YoY growth projection for the fourth quarter, aligning with an updated annual growth target of 4.0%. In our earlier GDP preview report, we anticipated the possibility of growth dipping below 4.0%, citing possibility for a weaker third-quarter growth, but it outperformed. Nevertheless, we remain vigilant and open to adjustments, which will be made periodically, especially in response to any significant setbacks in the country's economic trajectory.

• Turning our gaze towards 2024, we anticipate a more robust GDP growth trajectory of 5.0%. This optimistic outlook is fueled by the expectation of a sustained global economic recovery, particularly in China, which is poised to drive heightened external demand. The Malaysian government's unwavering commitment to pro-growth initiatives is expected to persist, further supported by increased political stability. This, in turn, has the potential to bolster confidence among foreign investors, potentially resulting in a greater influx of capital and portfolio investments.

Source: TA Research - 20 Nov 2023