Highlights

• The Malaysian economy expanded by 4.2% YoY in the first quarter of this year, a tad lower than our 4.3% YoY forecast. The expansion exceeded both the consensus and the Department of Statistics Malaysia's (DOSM) advanced estimates of 3.9% YoY. It was also much stronger than the revised 4Q23 GDP growth of 2.9% YoY (initial: 3.0% YoY).

• As tabled in Figure 1 below, all sectors experienced faster growth than initially estimated, with the exception of import duties. We observed that the actual GDP for this period deviated from the advanced estimate. This discrepancy is likely because at the time of the advanced estimate release some indicators for the first quarter, including March data, were not available. For instance, the improvement in construction activity (total work done) during the quarter was unexpectedly strong, contributing to double-digit growth in the GDP segment. That said, it is not unusual for the actual figures to vary from the estimates.

• In terms of absolute value, the total output amounted to RM397.39bn, surpassing 1Q23's RM381.37bn but below 4Q23's RM410.31bn. The QoQ contraction in the first quarter is normal based on historical trend. On a non-seasonally adjusted QoQ basis, it witnessed a 3.1% decrease, compared to the previous quarter's 3.1% gain.

• The monthly economic performance showcased resilient growth rates of 4.8% and 5.0% YoY in January and February 2024, respectively. However, it exhibited a deceleration trend in March 2023, with a growth rate of 2.9% YoY (compared to Oct23: 3.4% YoY, Nov23: 3.1% YoY, Dec23: 2.3% YoY).

• On another note, the nominal GDP increased by 4.8% YoY to RM464.77bn in 1Q24 (4Q23: 1.8% 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. It rose by 0.6% YoY in 1Q23, compared with -1.1% YoY in the previous quarter. The CPI was up by 1.7% YoY during the quarter (4Q23: 1.6% YoY) while core inflation increased by 1.8% YoY (4Q23: 2.1% YoY).

• Briefly, all sectors on the supply side showed better growth, with Services and Manufacturing (1.9%) sectors continued to propel the overall performance. Private consumption expenditure (5.1%) and Gross fixed capital formation (9.6%) were the main catalysts of the economy on the demand side.

Our View/Outlook

• Overall, it is a promising start for Malaysia. The results exceeded most expectations, and we believe this positive trend will continue. The economy is poised to demonstrate resilience, supported by a flourishing labour market, consistent domestic demand and recovering external demand.

• Notably, the country has witnessed a progressive decline in the unemployment rate, reaching a pre-pandemic level of 3.3% since October of last year. Concurrently, there has been a significant reduction in the average number of unemployed individuals, with March figures standing at 566.6k compared to 588.7k in March 2023. Furthermore, the average number of employed individuals has continuously increased, reaching a record high of 16.53mn in the same month.

• Additionally, the implementation of a progressive wage model will be pivotal in raising productivity and, consequently, individual income levels. This initiative, set to be launched as a pilot project in June this year, will cover six sectors: construction, manufacturing, wholesale and retail trade, motor vehicle and motorcycle repair, information and communication, as well as professional, scientific, and technical activities. Selected companies will receive a maximum incentive of RM200 per month for each entry-level employee and a maximum of RM300 per month for each non-entry-level employee.

• These encouraging developments in the labour market — characterised by declining unemployment rates, a growing number of employed individuals, and rising income levels—are instrumental in bolstering Malaysia's economic stability. Such trends underpin the robustness of domestic demand, fostering a positive environment for sustained economic growth and prosperity.

• The GFCF is also expected to chart a stronger momentum going forward, putting investment as one of the main catalysts of growth. Data from the Malaysian Investment Development Authority (MIDA) show that between 2021 and 2023, the National Committee on Investment approved 2,386 manufacturing projects. Remarkably, 74.0% of these projects are already in various stages of implementation, ranging from production to factory construction and machinery installations. MIDA has demonstrated exemplary dedication in engaging with stakeholders at both federal and state levels, significantly contributing to the facilitation and realization of approved investment projects. In addition, annual observations of project implementation performance reveal that over 85% of approved manufacturing projects in 2021 and 2022 have been successfully implemented. Notably, 50.1% of projects approved in 2023 have already begun implementation. This is a positive trend, considering that the completion timeline for manufacturing projects generally ranges from 18 to 24 months, depending on the complexity of each project. The rising realisation of approved investments is a promising sign that this will drive growth for this year.

• On the external front, we anticipate a steady improvement in Malaysia's trade momentum this year. A potential upswing in external demand, particularly from China — our primary export market — adds a promising dimension to the economic landscape. The rebound in demand from China suggests that Malaysia could benefit by increasing its trade volume with the country. This expected turnaround in demand, especially from such a significant trading partner, bodes well for Malaysia's export-driven sectors, with China contributing about 12.3% of Malaysia's total exports.

• On another perspective, we believe that Malaysia stands in a unique position amidst the recent tariff hikes imposed by the US. While the escalation of trade tensions between the US and China might initially seem detrimental to Malaysia due to its close economic ties with China, there are potential avenues through which Malaysia could benefit from this situation. Malaysia has been striving to diversify its export markets beyond its traditional reliance on China. The imposition of tariffs by the US on Chinese goods, including electric vehicles (EVs) and related components, could create an opportunity for Malaysia to step in and fill the gap left by Chinese manufacturers. Malaysian companies specialising in the production of EV components, such as lithium batteries and semiconductors, could find increased demand from US manufacturers looking for alternative suppliers outside of China.

• Malaysia has been actively pursuing its own ambitions in the green technology sector, aiming to become a hub for electric vehicle manufacturing and related industries in Southeast Asia. The US tariffs on Chinese EVs and batteries could incentivise multinational corporations, including those from the US, to consider Malaysia as a viable alternative manufacturing base. This could potentially attract foreign direct investment into Malaysia's green technology sector, leading to job creation and technology transfer. By positioning itself as an alternative manufacturing hub for EV components, Malaysia can mitigate the impact of escalating US-China trade tensions and foster economic resilience.

• As the first-quarter GDP results of 2024 aligned closely with our projections, we are confident in maintaining our GDP forecast for the entire year at 4.7% YoY, compared to the previous year's growth of 3.6% YoY. Looking ahead, we anticipate even more promising signs of economic growth in the second quarter, with expectations of reaching as high as 5.5% YoY.

• In addition to the factors mentioned earlier, the revival of tourism activities is poised to contribute positively to economic growth in the upcoming quarters. According to the Tourism, Arts and Culture Minister, tourism in Malaysia is experiencing an upward trend, with 5.8mn tourists visiting in the first quarter of 2024. This increase can be attributed in part to the 30-day visa exemption for Chinese and Indian tourists, which has boosted arrivals in Malaysia.

• Moreover, the ministry aims to further enhance tourism by increasing flights to destinations such as West Asia, China, India, and South Korea, thus encouraging more direct flights into the country. Visa facilitation, alongside improved accessibility and flight connectivity, plays a crucial role in achieving the goal of attracting around 36mn tourists and generating RM150bn for Visit Malaysia 2026. Prior to that, Tourism Malaysia are confident of achieving the 27.3mn foreign tourist arrivals this year (2023: 20.14mn; 2022: 10.07mn)

• However, we foresee potential challenges in the second half of 2024 as the government's subsidy rationalisation efforts come into play. These efforts, aimed at reducing fiscal deficits and reallocating resources more efficiently, may lead to adjustments in individual incomes. In what Bank Negara described as “short term pain and long-term gain” scenario, this could result in altered spending patterns among consumers, as disposable income may decrease for some households. Consequently, consumer confidence and spending might decline in the short term, posing a downside risk to overall economic growth. Additionally, the subsidy rationalisation could impact specific sectors more heavily, particularly those reliant on government support. Businesses in these sectors may face higher costs, leading to slower expansion and reduced hiring, which could further dampen economic momentum. However, all these consequences are expected to be only a blip. Bank Negara even concurred the view that it is time to implement such rationalisation based on the resilient performance of economic growth and manageable inflation.

• Nevertheless, we believe that the impact will be cushioned by the EPF withdrawal policy. The Employees Provident Fund’s (EPF) flexible account, known as Account 3, has already gone live, allowing pre-retirement account holders to withdraw up to 10% of their balances for any purpose. While it is much less than the special withdrawal of up to RM10,000 allowed two years ago due to the Covid-19 pandemic, it is still expected to boost consumption and help increase disposable income.

• Bank Negara has a conservative view on this and the positive impact could be lessened by uncertain consumers’ behaviour and their reaction over the economic outlook. Furthermore, the EPF has guided that if every member opts for the one-off transfer from Account 2 to Account 3, the amount involved will be RM57bn. The provident fund also estimated that RM25bn of that amount may flow out of Account 3 in the first year, based on patterns from pandemic-related withdrawal schemes, before moderating to RM4bn to RM5bn per annum thereafter. That is much lower than the RM44.6bn recorded in the previous special withdrawals.

Source: TA Research - 20 May 2024