The Malaysian economy is likely to see weaker growth, estimated at 4.1%, in 2023 compared to an estimated 8.5% in 2022, reflecting largely the normalisation of technical high-base effects.
THE economy has staged a strong recovery to grow by an average of 9.3% in the first nine months of 2022, partly attributable to a low-base effect, and is estimated to end the year at 8.5% (3.1% in 2021).
The engines of growth were buoyant domestic demand and sustained expansion of exports, robust consumer spending (12.7% growth in January-September 2022) and largely pent-up demand induced by cash/financial assistance stimulus (a total of RM145bil in Employees Provident Fund or EPF withdrawals, Bantuan Keluarga Malaysia and loan repayment assistance).
Aided by a favourable low-base effect, private investment also strengthened from 3.3% in the first half of 2022 to 13.2% year-on-year in September 2022, amid increased business costs and shortage of workers.
Buoyant exports continued for two consecutive years (26.1% in 2021; 27.2% in January-November 2022), thanks to both volume and price effects as reflected in the higher demand for electronics and electrical products, chemicals, metal products, crude petroleum and liquefied natural gas.
Bank Negara has embarked on an interest rate normalisation on a measured pace as it balances between containing inflation risk and ensuring firmed economic recovery.
The benchmark overnight policy rate (OPR) was hiked by a cumulative 100 basis points (bps) in three successive times to 2.75% at end-December 2022.
Navigating the economy in 2023
The Malaysian economy is likely to see weaker growth, estimated at 4.1%, in 2023 compared to an estimated 8.5% in 2022, reflecting largely the normalisation of technical high-base effects.
Moderating exports, the normalisation of domestic demand, the continued dampening impact of inflation and higher cost of living, and the lagged effects of interest rate increases will weigh on domestic economic growth.
Certainly, the interplay of weakening external environment, the new government’s macro-narratives, domestic inflation and interest rates will ultimately shape Malaysia’s economic growth outlook for 2023.
Export moderation to drag growth this year
Export growth momentum has seen softening in September-November 2022, due to the weakening demand of major manufactured goods such as electronics and electrical products, chemical and chemical products, machinery equipment as well as lower prices of crude oil and crude palm oil (CPO).
We estimate exports to slow down to 1.8% in 2023, from an estimated 26.5% in 2022, reflecting the dampening impact of weakening global demand, easing prices of energy and commodities as well as being challenged by the high-base effects.
We see lower Brent crude oil price (US$95 or RM417.70 per barrel in 2023 versus US$100 or RM439.68 per barrel in 2022); and CPO price (RM3,850 per tonne in 2023 versus RM5,123 per tonne in 2022).
The risks of caution ahead in 2023 is the risk of a global recession. We expect a weaker global economic growth, estimated at 2.5% to 2.7% in 2023, with a mild recession in the United States and Europe.
China’s better economic prospect in the second half of 2023, estimated at 4.5%, will act a global stabiliser as Beijing authorities unwind the zero-Covid movement restrictions.
The forces that weigh on the global economy are:
> Continued dampening impact of inflation and cost of living crisis though inflation risk will cool off due to higher interest rates;
> The laggard impact of higher interest rates and tighter global liquidity conditions;
> Bloated retail inventories adjustment as consumer demand slows.
What to watch in 2023?
> When will the US Federal Reserve (Fed) pivot on its interest rate hikes? What could be a turning point?
While the Fed will shift to smaller magnitude of rate hikes (2023 forecast: 5% to 5.25% Fed funds rate), the higher interest-rate level will stay longer throughout 2023 until the inflation risk is anchored and come down to 3% to 4%.
> Geopolitical concerns surrounding the Russia-Ukraine conflict remain; will it come to an end or develop into a new round deepening rift?
> Geopolitical tensions between the United States and China is likely to get more intense as both Democrat and Republican lawmakers will continue to up the ante in domestic policies to counteract against China in the run up to the US Presidential Elections in 2024.
Domestic demand will normalise to a more sustainable pace. Household spending is expected to normalise towards its medium-term growth trajectory from 2023-2024, estimated at 5.5% to 6%, after expanded “significantly on pent-up demand” by an estimated 11% in 2022.
During the 2020’s Covid-19 pandemic, private consumption declined by 4.2%, before recovering slowly to 1.9% in 2021.
Consumer spending’s growth migration to sustainable levels is due to:
> Post the Covid-19 pent-up demand normalises as the extraordinary cashflow assistance measures, such as RM145bil EPF withdrawals and loan repayment assistance ended;
> Continued impact of rising inflation and higher cost of living will erode purchasing power;
> Higher interest rates (borrowing costs) for high debt borrowers mean that consumers don’t have as much disposable income and must cut back on spending.
Good news is that labour market conditions had improved to 3.6% at end-October 2022, with increasing labour participation rate nearing the pre-pandemic level.
Private investment had regained growth traction to expand by 6.3% in January-September 2022, and will likely expand by 4.5% in 2023 (estimated at 5.8% in 2022), reflecting the continued investment in the manufacturing sector and some services sub-sectors such as telecommunications related to 5G network as well as the climate-related green investment.
Other issues include increased business costs, the shortage of workers and external uncertainties as well as businesses and investors’ anxieties over the domestic policies landscape post-15th General Election.
Inflation concerns
Will inflation worries subside? Headline inflation is estimated to increase between 2.8% and 3.3% in 2023 (estimated at 3.5% in 2022), following stable commodity prices as well as a gradual move towards targeted subsidies mechanism.
With the government focusing on tackling the impact of inflation and higher cost of living on the low and middle-income households, we expect the targeted subsidy rationalisation will be implemented on a measured pace.
Domestic interest-rate normalisation will continue. Going into 2023, Bank Negara’s policy rate is firmly weighted to the upside as domestic price pressures will likely remain higher than the historical average of 2.2% in 2011-2019, amid real interest rates remaining negative.
We maintain our view that Bank Negara will raise interest rates by an additional 50 bps back to its pre-Covid level of 3.25% in 2023 to safeguard macroeconomic stability.
What could offer positive surprises to Malaysia’s economic growth? The Unity Government has to ensure a stable and good governance political system and economic ecosystem, the key precondition to rebuild businesses and investor confidence.
Both micro and macro-narratives must be backed by good execution of institutional and economic reforms while considering the timing and pace of reforms to smoothen the transitory impact on the economy, households and businesses.
The implementation of moderate, sustainable and pro-business friendly policies is expected to increase economic growth and drive both domestic and foreign investments. It is important to have something concrete to regain confidence and secure investments.
It is reckoned that some policies under the previous administration could be subjected to review and fine-tuning; the overall policy thrusts shall still be to ensure the policies, initiatives and projects are adding value (measurable multiplier impact) on the domestic economy.
In a broad sense, both Pakatan Harapan and Barisan Nasional’s manifestos address and provide structural solutions for the rakyat’s concerns about the immediate economic issues (cost of living, income and jobs), education, healthcare and climate change-related impact.
Governance and institutional reforms also featured prominently, underscoring the importance of reforming political and public institutions to ensure effective governance, transparency and accountability of the government’s administration.
Both manifestos have some notable common offerings though we believe that some initiatives can be implemented immediately, in particular concerning people-centric measures to ease the impact of inflation and higher cost of living on the B40 households.
We view positively the laid-out pledges to ensure good governance practices and to undertake institutional reforms.
With a convincing two-thirds majority, we hope that the Unity Government can front-load as well as prioritise the implementation of governance and institutional reforms. Political reforms do not incur any fiscal costs compared to economic and social reforms.
Faced with public and investors’ lack of confidence and distrust, effective governance and credible institutional reforms are deemed critical to improving state institutional capacity as the precondition to build capable, transparent, efficient and trust as well as confidence in government and public institutions.
As institutions affect the economy through the creation of an environment necessary for economic growth, prosperity and development, the effectiveness of political and economic institutional reforms would not only have a positive impact on economic growth but also increase the level of investment because it gives more confidence to investors and businessmen and the business environment is more competitive for economic potential.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
