• In the last quarter of 2023, Malaysia's real Gross Domestic Product (GDP) experienced a moderate YoY growth of 3.0% YoY. While this expansion fell slightly below the consensus estimate of 3.4% YoY, it aligned with our expectations as outlined in the GDP preview after incorporating the latest monthly economic indicators. 

• The growth was also below the Department of Statistics Malaysia’s (DOSM) advanced estimate of 3.4% YoY and the 3.3% YoY growth achieved in the preceding quarter. The main revisions that we saw in the final reading were for the services and manufacturing sectors compared to the advanced estimates. The services sector’s growth was marked down to 4.2% YoY from 4.7% YoY in the advanced estimate, and the manufacturing performance was revised lower to a 0.3% YoY contraction from a 0.1% YoY growth. While inventory restocking contributed significantly to the quarterly GDP growth by 1%-point, this suggested that firms were producing products that are not being sold due to low demand , both from domestic and international side. 

• In contrast, the growth rates for the mining, construction, and agriculture sectors were all revised upwards to 3.8% YoY (from 3.7% YoY previously), 3.6% YoY (2.5% YoY earlier), and 1.9% YoY (1.2% YoY before), respectively. 

• On the demand side, growth in consumer spending, which formed 60.8% of the total GDP, decelerated to 4.2% YoY from 4.6 YoY in the previous quarter. While the labour market continues to improve, as indicated by lower jobless rate and increasing employed workers, we believe consumers were cautious in their spending habits. This is reflected in the Consumer Sentiment Index (CSI), which has hovered below 100 points for four consecutive quarters, signalling that consumers were mostly pessimistic about the prevailing economic conditions. In 4Q23, CSI was at 89.4 (3Q23: 78.9). 

• On top of that, Malaysia’s net exports declined by 35.6% during the final quarter of 2023 compared with -22.7% in the previous quarter. Real exports were weaker than real imports (see figure 1). Being an open economy, any gyration in external demand will be effectively transmitted to our exports and the manufacturing sector. 

• Some other concerns:
  
  - The monthly economic performance showcased resilience growth rates of 3.9% YoY and 3.8% YoY in October and November 2023, respectively. However, it exhibited a deceleration in December 2023, with a growth rate of 1.4% YoY (compared to July23: 4.2% YoY, Aug23: 3.2% YoY, Sep23: 2.6% YoY).
  
  - On a quarterly basis, the economy contracted by 2.1% QoQ in the fourth quarter versus 2.6% QoQ in the third quarter. That is the biggest quarterly contraction since the Covid-19 pandemic. That contraction was during 4Q22 at -1.7% QoQ. Private Consumption contracted by 3.0% QoQ while the manufacturing sector was stagnated at 0.7% QoQ. On the positive side, exports were better at 1.0% QoQ in 4Q23 as the weaker Ringgit and the gain in competitiveness helped. 

• On another note, the nominal GDP increased by 1.9% YoY to RM476.40bn in 4Q23 (3Q23: 1.3% 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 1.1% YoY in 4Q23, compared with -2.0% YoY in the previous quarter. For comparison, the Consumer Price Index moderated by 1.6% YoY during the quarter (3Q23: 2.0% YoY) while core inflation moderated further to 2.1% (3Q23: 2.7%).

Our View/Outlook

• Considering another moderate GDP growth in the final quarter, the Malaysian economy exhibited a 3.7% YoY expansion, reaching RM1.57tn in 2023 (See Figure 6). This figure fell slightly below both consensus and government targets of 3.8% and 4.0% YoY, respectively. In essence, every sector recorded a more subdued performance compared to 2022 when the GDP witnessed a robust 8.7% YoY growth. The sole exception to this trend was the agriculture and construction sectors, which experienced more favourable growth in 2023 on the supply side. 

• The shock of the pandemic is over, but the effects are still present. The question now is whether 2024 growth would rebound partly due to the low base effect. Our view is now slightly different than our last Annual Strategy report, after taking into consideration of present economic indicators and projections. 

• In summary, we may see a bumpy growth path in the first half of the year before gradually pick-up in the second half. While some were discussing there is room for Bank Negara to cut the OPR should economic condition worsens, for now we don’t see any urgency for that to happen in the immediate term. This is despite some hints by major central banks in world that their respective monetary conditions will begin to ease. The next MPC meeting is on 6-7 March 2024. We will get further insights from Bank Negara in its upcoming Annual Report on 20 March 2024. 

• We cut down our 2024 GDP forecast to 4.7% YoY, totaling RM1.64tn — a revision made in accordance with Figure 7. Initially, our anticipation was a 5.0% YoY growth for this year. It is still within the 4.0% to 5.0% YoY projection range made by the Ministry of Finance during the Budget 2024 presentation last year. While the economic landscape shows signs of improvement, it is still early to form a robust assumption, particularly given the limited actual data available to substantiate this higher growth rate. 

• We are now less optimistic on the private sector. Despite the stable labour market, income growth is not catching up. The Progressive Wage Model is still in the pilot project and there is no change in our RM1,500 minimum wage (while other ASEAN countries are revising their wages higher). 

• However, a good thing is the dominos effect from the tourism sector will help the services sector. Tourism Malaysia is confident of achieving 27.3mn foreign tourist arrivals this year due to several supporting sectors, including the government’s charter flight matching grant incentive, Visa Liberalisation programme and increasing tourism promotion activities abroad. 

• A potential upswing in external demand, particularly from China — our primary exports market — adds a promising dimension to the economic landscape. This expected turnaround in demand, especially from such a significant trading partner, bodes well for Malaysia's export-driven sectors. Global tech upcycle will also add boost to our exports recover this year. We expect a bottoming out of the electronics exports downcycle, likely in the 2H24, which will help mitigate downside risks to exports growth. It is worth noting that E&E products comprised over 40% of exports value in 2023.

Source: TA Research - 19 Feb 2024