PETALING JAYA: Economic experts remain cautious about Malaysia’s gross domestic product (GDP) growth prospects for the subsequent quarters of 2023, in spite of the better-than-expected showing for the first three months (1Q23) that saw the country post a 5.6% expansion rate.
While staying firm in their belief that domestic consumption would remain robust, carrying on as Malaysia’s main economic driver which is in line with Bank Negara’s projections, they largely opined that GDP could ease over a combination of both local and external factors.
Adding to the context is that Malaysia’s 1Q23 GDP growth number is the second highest in Asean, just behind the 6.4% registered by the Philippines, while edging out Indonesia’s 5%, Vietnam at 3.3% and Thailand, which disclosed its 1Q23 growth rate of 2.7% yesterday.
In an early report published in conjunction with Bank Negara’s GDP data release last Friday, Singapore-based UOB Global Economics & Markets Research economists Julia Goh and Loke Siew Ting said the external outlook has grown more doubtful.
This was given tighter global financial conditions, US banking and debt ceiling concerns and lingering geopolitical risks, as well as mixed signs on China’s post-pandemic recovery.
This is especially pertinent given China is set to announce its key economic data this week, with Bloomberg suggesting that the widely expected year-on-year (y-o-y) growth is in comparison to an extraordinary period last year when many parts of the Middle Kingdom were subjected to draconian lockdowns, and as such, a quarterly comparison may offer a more accurate picture.
Goh and Loke are also anticipating normalisation and moderation in domestic economic activities which is expected to set in post-Hari Raya Aidilfitri.
They added: “There is also the prospect of subsidy rationalisation measures in the second half of 2023 (2H23) that could post more upside pressure for consumer price inflation, living costs and business operating costs should they materialise, which will weigh on private-sector consumption.”
If the low-base effect of last year is working to mask China’s weakening recovery, the UOB duo went on to post a reminder that the opposite could be true for Malaysia, which experienced a bumper 2022.
“High-base effects from last year will also weigh on the y-o-y growth momentum for Malaysia from 2Q23 onwards. Recall that real GDP grew by 8.9% in 2Q22, 14.2% in 3Q22 and 7% in 4Q22,” they said.
Reflecting the better-than-expected 1Q23 GDP performance, the UOB team is raising its full-year GDP growth forecast for Malaysia to 4.4% for 2023 from 4% previously, while keeping an average GDP expansion of approximately 4% for the rest of the year.
In a similar vein, economists at CGS-CIMB Research Nazmi Idrus and Mas Aida Che Mansor believe the private consumption factors of improving labour market conditions, higher minimum wage and cash transfers – often being credited as the reasons the Malaysian economy had performed reasonably well in 1Q23 – would have limited impact, going forward.
In addition to the y-o-y high-base effects of 2Q and 3Q22, which would be hard to emulate, let alone surpass, Nazmi and Mas Aida are anticipating the government to pursue some form of fiscal consolidation which may dampen consumption, though perhaps not too significantly.
They said: “The reopening of China’s borders and the expected arrival of Chinese tourists could also disappoint, considering that China is struggling with a slowing economy and structural problems in the real estate market.”
Of interest, therefore, is the remark by economist and chief executive for the Centre for Market Education Carmelo Ferlito that it was important for Malaysia to embark on a sustainable growth path.
He told StarBiz: “While it is good to see the Malaysian economy on a positive route, the growth is still very much driven by private consumption, with private investment playing a minor role when compared to consumption and government investment.”
Noting that economic growth cannot be sustained solely on consumption, Ferlito said the expansion of the manufacturing sector has also been sluggish compared to services
“Hence, these are two elements which should at least make us think what can be done to push more towards investments and manufacturing,” he pointed out.
Resonating with the prudent tone of other economists, Malaysia University of Science and Technology economics professor and dean Geoffrey Williams believes that strong headwinds are likely to moderate growth for the full year, coupled with the high-base y-o-y effects of 2H22 which was underpinned by pre-election public spending.
On the other hand, Williams told StarBiz there was still ample government spending planned in the retabled Budget 2023, which will provide support for continuous growth from 2Q23.
Aside from the issue of sustaining growth, economists are however split on whether the central bank would be increasing the overnight policy rate (OPR) further this year.
For example, CGS-CIMB Research is of the opinion that with inflation still pervasive, Bank Negara could raise the OPR by another 25 basis points in 2H23 to 3.25%, a view supported by Ferlito, who said the predominant role of consumption growth in the general GDP performance may indeed act as a justification for further OPR hikes.
Ferlito had earlier said the removal of government interventionist policies such as subsidies and price ceilings would be a long-term solution to inflation, while cautioning that such action would initially lead to more escalation in prices over the short term.
Concurrently, UOB’s Goh and Loke, together with Hong Leong Investment Bank Research, are expecting the central bank to hold on to its present OPR of 3%, barring any unexpected “wild cards” in terms of policy changes that may drastically accelerate inflation.
In contrast, Williams argued that with easing inflationary pressures, increasing the OPR would not be beneficial.
“Raising interest rates will slow growth and spending and this is not positive for investment. It will also not stop investment from leaving the country, since this would be driven by the overall investment environment in local and global markets not so much by higher interest rates,” he highlighted, before mentioning that lower interest rates in Malaysia would support growth and spending, as well as making local borrowing cheaper which would support investment here.
Head of research of TA Research, Kaladher Govindan, shared that view, saying in his research report that the recent interest rate hike is anticipated to have an influence on the 2Q23 growth trajectory.
He said: “It is crucial to recognise that an interest rate hike generally results in increased borrowing costs for individuals and businesses alike. Higher interest rates translate to elevated borrowing expenses from banks, which can potentially lead to reduced borrowing activity, subsequently slowing down investment and consumption.
“The impact of the interest rate hike extends to individuals who may face higher mortgage rates, potentially affecting their ability to purchase homes or invest in property. Similarly, businesses may encounter challenges in accessing affordable credit for expansion or investment projects, which could dampen economic activity.”
