THE latest Bank Negara briefing presented a mixed bag of economic data for Malaysia.
On the bright side, it was announced that Malaysia recorded its strongest annual economic growth in two decades for 2022.
With a 8.7% growth, exceeding expectations, the economy has surpassed the pre-pandemic level of 2019.The labour market is recovering, domestic demand continues to expand and the country’s headline inflation has been losing steam, despite averaging at 3.3% for 2022.
But beyond the headline figures, the devil is in the detail and this is where the concerns emerge.
On a seasonally-adjusted quarter-on-quarter basis, the economy contracted by 2.6% in the fourth quarter of 2022 (4Q22), after slowing down in the previous three quarters.
Economist Geoffrey Williams warns that this is the “first stage of a technical recession”.
Three main sectors of the economy – construction, agriculture as well as mining and quarrying – remained below the pre-pandemic level.
Within the services sector, some sub-sectors are also below pre-pandemic levels, namely food and beverage, accommodation, real estate, business services and private education.Underlying or core inflationary pressures have remained stubbornly high at 3% in 2022 and are expected to stay elevated, despite some moderation this year.
Credit growth also slowed down in 4Q22 as loan repayments outpaced disbursements.
Malaysia’s mixed economic performance is not surprising. While the country has recovered well from the effects of Covid-19 restrictions, it had to manage various domestic and external headwinds.
Such a situation is not exclusive to Malaysia.
As support from the stimulus measures and low-base effect waned, it becomes tougher for Malaysia to maintain a supernormal growth like the 14.2% economic expansion seen in 3Q22.
In short, the “honeymoon” period post-reopening of the economy in October 2021 has come to an end.
However, in trying to allay fear, Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus reiterates that Malaysia is unlikely to enter into recession this year.
In a briefing to reporters, she says that sustained domestic demand and spending are set to continue anchoring growth this year.
“We do expect that growth will continue in 2023, but at a much more moderate pace due to slower external demand,” she says.
The latest official gross domestic product (GDP) projections would be released in the upcoming Budget 2023 to be tabled on Feb 24.
Nor Shamsiah, however, acknowledges that the balance of risk to growth remains tilted to the downside, driven by external factors.
“They include weaker-than-expected global growth, further escalation of geopolitical tensions and reemergence of significant supply chain disruptions. Despite the challenging environment, we do not discount the possibility of growth being higher than expected. Upside risks could stem from stronger pent-up demand in major economies and stronger recovery in the labour market and tourism sector,” she says.
For 4Q22, Bank Negara announced that the GDP expanded by 7% year-on-year. The growth was still above the long-term average of 5.1%.
The 4Q22 growth was supported by continued expansion in private consumption and investments, improving labour market conditions, resilient demand for electrical and electronic (E&E) goods as well as the recovery in tourism activities.The services sector grew by 8.9% y-o-y, down from 16.7% in 3Q22.
Nor Shamsiah explains that the sector was supported by consumer and business services activities.
The manufacturing sector expanded by 3.9% y-o-y in 4Q22, on the back of continued expansion in E&E, primary and consumer clusters. In comparison, the sector grew by 13.2% y-o-y in 3Q22.
On the quarter-on-quarter contraction in 4Q22, Nor Shamsiah says it was due to the exceptionally high growth in the previous third quarter.She points out that the contraction reflects “temporary slowdown” in Malaysia’s growth momentum.
However, Malaysia University of Science and Technology economics professor Williams says the seasonally adjusted data was not “at all rosy”.
“The contraction in activity is broadly based. Services contracted by 2.6%, manufacturing contracted by 2.4%, mining fell 3.7% and construction fell 7.3%. Only agricultural and palm oil rose by a modest 1.4%.
“In terms of the drivers of growth private consumption fell 2.9%, investment was flat at only 0.3% growth and government expenditure fell by 5.4% as the pre-election boom ended,” he says.
Great Transition
According to Williams, such contraction represents the “Great Transition” to a new phase of economic performance.
It reflects the deep damage done by the lockdowns and the policy mistakes of pushing excessive demand last year forcing growth that is inconsistent with the underlying supply potential of the economy.
“This is one reason for the high inflation and higher interest rates,” he adds.
Meanwhile, Centre for Market Education CEO Carmelo Ferlito says economic growth is already showing signs of cooling down, and this comes mainly from a slowdown in private consumption, while investments seem to decelerate at a slower pace.Nevertheless, he says this can be an occasion to build a different model of sustainable economic growth, centred on savings and investments, rather than private consumption and government spending.“We believe that savings and investments are the pillars for sustainable economic growth, while an economic model built on consumption and government spending is incentivising debt and inflation,” according to him.
With still a high degree of global uncertainty and a domestic policy scenario yet to be defined, Ferlito recommends that the government implements several initiatives.
They include promoting financial literacy, easing the process to doing business in terms of general regulations, banking structure and labour legislation, and strengthening international free trade with straight-forward and easy-to-implement bilateral agreements.
Ferlito also called for a fiscal reform that entails a reduction of income tax, while strengthening enforcements, and the introduction of a new goods and services tax.
Looking into 2023, while challenges are abound, it is not all doom and gloom.MIDF Research anticipates the domestic economy to expand further by 4.2% this year.
The reopening of China’s economy sooner than predicted is expected to provide extra boost to Malaysia’s services exports as well as tourism activity, MIDF Research says in a note.
However, Nor Shamsiah foresees domestic demand to remain as key driver of growth, amid the slowing global demand.
Employment prospects
The improving economic outlook and employment prospects will also continue to be of greater significance in supporting household debt servicing capacity, according to her.
“Improving labour market conditions and the continued availability of assistance for borrowers has supported household borrowers in facing higher borrowing cost.
“Based on a conservative simulation, household impairments are only expected to increase marginally from further increases in borrowing costs.
“Only 0.1 percentage point of the increase in impairments are expected to arise from simulated overnight policy rate (OPR) increases.
“Instead, the uneven nature of economic recovery plays a stronger role in driving loan defaults,” she says.On the decision to maintain the OPR at 2.75%, Nor Shamsiah explains that it will allow Bank Negara to assess the impact of its past OPR adjustments to the inflation and economy.
“This would give us better clarity on the inflation and economic outlook amid the evolving global economic environment, and how we act next.
“It it is important to remember that monetary policy works with a lag and it will take some time before we start to see demand pressures easing.
“We have moved in a measured and gradual pace, especially when compared to other countries,” she adds.
Concurring with Nor Shamsiah, Williams says that Bank Negara must “wait and see” how the earlier 100 basis points OPR hikes have affected growth.
“It signals the OPR might be flat for the rest of the year now that it is in its normal historical range,” says Williams.
