EXPORTS are likely to remain a drag on the economy, weighed down by slowing global demand, a moderate recovery in global semiconductor sales and moderating prices of commodities and energy.
Malaysia’s exports slowed to 2.8% year-on-year (y-o-y) in the first quarter of 2023 (1Q23) from 11.8% in 4Q22.
Exports growth in goods fell to minus 8.5% y-o-y from 3.3% in 4Q22; the contraction in imports of goods was deeper at minus 10.7% y-o-y from 3.8% in 4Q22.
Private and government consumption, as well as private investment, slowed in 1Q23; growth also slowed across all key sectors including agriculture, manufacturing, construction and services.
Mirroring the weakness in external demand, the current account surplus narrowed sharply to RM4.3bil – 0.9% of gross domestic product (GDP) – from RM27.5bil (5.9% of GDP) in 4Q22.
Exports further contracted for a second month in a row at 17.4% in April 2023, probably due to a reduced number of working days and lower productivity during the festive season.
Challenged by the slowing global economy and high base effects in 2022, exports could go into the negative on a y-o-y comparison, going into 3Q23, said Socio Economic Economic Research Centre executive director Lee Heng Guie.
The intensified US-China chip war and supply chain disruptions, as well as the replication of global technology supply chains within China, could lead to global over-capacity and price wars.
The weakness in exports of goods in 1Q23 portends further weakness for the economy for the rest of 2023, as economic recovery in the main trading partners remains constrained by still tight monetary policies and elevated domestic interest rates, said Oversea-Chinese Banking Corp senior Asean economist, treasury research and strategy, global treasury, Lavanya Venkateswaran.
Manufacturing exports have shown two consecutive months of negative growth y-o-y with the possibility of more declines ahead after a strong double-digit growth recorded in 2022.
Malaysia’s electrical and electronics (E&E) exports that account for 41.9% of total exports, have begun to moderate, with average monthly growth of 1.4% in the first four months of 2023 (27.2% in the same period in 2022).
Chip contraction
The contraction in global semiconductor sales in 1Q23 of 21.3% y-o-y may foreshadow further possibility of weak E&E exports in the months ahead, said CGS-CIMB Research in a report.
China’s recent weakness in trade and manufacturing activity will further exacerbate the fragility in global trade demand.
Malaysia’s exports growth to China contracted by 11.1% y-o-y, risking the outlook for 2023; China accounted for about 13.2% of Malaysia’s total exports in April 2023.
The government should focus on managing inflation expectations and wage growth to keep the growth momentum going.
There should be more policy clarity now and not after the state elections in 3Q23. Investors value policy predictability and stability to make critical decisions, said Bank Islam Malaysia chief economist Firdaos Rosli.
The government and central bank need to ensure they have the policy space to prescribe a stabilisation policy when the time comes.
The central bank would have the room to cut the policy rate, and the government would have the means to spend more and tax less.
That is why the government has to normalise its expansionary fiscal policy when the economy has recovered to rebuild its fiscal space or buffer.
The government also has to implement economic reforms such as rationalisation of subsidies, improving the governance structure, transparency and reducing the bureaucracy so that the economy would be able to grow more sustainably.
By implementing reforms, it will ensure that money is spent on important matters such as education, healthcare and infrastructure.
If the government can do it right, it will improve productivity, leading to better remuneration to input factors such as labour, said Bank Muamalat chief economist and social finance, Mohamed Afzanizam Abdul Rashid.
Although strong private consumption in 1Q23 has been attributed to improving labour market conditions, higher minimum wage and cash transfers, these factors could be limited, going forward.
Fiscal consolidation
There are risks ahead as the government may pursue some form of fiscal consolidation in terms of withdrawing the remnants of Covid-era support such as electricity bill subsidies.
This could dampen consumption although the impact is likely to be insignificant.
The reopening of China’s border and expected arrivals of Chinese tourists could disappoint, considering that China is struggling with a slowing economy and structural problems in the real estate market.
The impact of the implementation of the Employees Provident Fund special withdrawal in 2022, along with border reopenings, which propped up tourism-related sectors strongly, may not be matched this year, even with the expected arrival of Chinese tourists, said CGS-CIMB Research in an earlier report.
Providing some impetus to the economy are the trade agreements, higher foreign direct investments and investment approvals.
Potential export sales of RM2.44bil with nine major Chinese importers, resulting from Prime Minister Datuk Seri Anwar Ibrahim’s visit to China, is positive.
External geopolitical risks have led to diversification and re-orientation of trade and investment flows that have, to some extent, benefited Malaysia, said UOB Malaysia senior economist Julia Goh.
Malaysia has a broad and diversified economic base and does not solely rely on trade or exports to drive economic growth, with domestic demand making up a substantial portion of the economy.
The services sector, which is largely driven by domestic demand, accounts for about 60% of total GDP.
The growth of the services sector should support Malaysia’s overall economic growth in 2023, even if external demand is weaker, said RAM Rating Services head, economic research and senior economist, Woon Khai Jhek.
While domestic demand may still help to prop up the economy, specific measures are required to improve Malaysia’s economic performance.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.
