Good recovery: Malaysia’s diversified and relatively more sophisticated economy provided greater buffers than neighbouring countries with higher incidences of poverty and greater dependence on fewer sectors, like tourism. — Photos: FAIHAN GHANI/The Star
MALAYSIA’s economic data has been sending mixed signals throughout the second quarter of 2023, and continued into July and August. Some channel checks indicate continued moderate economic and business activities.
The Associated Chinese Chambers of Commerce and Industry of Malaysia’s business and economic conditions survey covering January to June and expectations for July to December indicated that a majority of respondents (66.8%) have “neutral” views on domestic economic conditions in the first half of 2023 (1H23)
The percentage of respondents being either ‘‘better’’ or ‘‘worse’’ is at 33.2%, with 23.7% reporting “worse”, higher than only 9.5% indicated “better” economic conditions. A higher percentage (24.5%) of respondents expect “worse” conditions in 2H23 relative to “better” by 19.1% of respondents. 33% of respondents expect improving economic prospects in 1H24.
These signals suggest that the country’s economy is on a slowing mode, from a year of robust 8.7% economic growth but unsustainable in 2022 and now is heading into an economic slowdown. Malaysia’s economic growth slowed further to 2.9% year-on-year (y-o-y) in 2Q23 from 5.6% in 1Q23 (7.1% in 4Q22), marking the third consecutive quarter of moderation and the slowest growth since 4Q21.
Real gross domestic product (GDP) growth expanded slower by 4.2% in 1H23 (6.8% in 1H22 and 10.7% in 2H22).
The 2Q GDP growth might not be the weakest quarter, growth in the third quarter could be even more challenging given the high base effect in 3Q22, whereby GDP growth was at the strongest of 14.1%.
We anticipate improved economic growth to around 4% in 4Q23, mainly due to better recovery in services on higher tourist arrivals, construction output as well as a modest pick-up in the manufacturing sector on year-end seasonal holiday spending.
Overall, we tweak our full-year 2023’s GDP growth estimate to 3.8% from 4.5% previously to reflect the weaker-than-expected Q223 GDP growth.
While we reckon that downside risks to the global economy and domestic economic conditions continued to persist, this current domestic economic slowdown feels more like a business-cycle slowdown than a typical recession, followed by a firmer recovery in 2024.
With the global economy continued growing, albeit still weak, there remain lingering concerns about the health of the United States and China economy.
While the US economy has been powered by resilient consumer demand, the lag impact of higher interest rates (means excessive borrowing costs) over the last 18 months will have a knock-on impact on consumer and business spending down the road.
China’s much-vaunted economic rebound post the Covid-19 restriction has been disappointing. Its slowdown is a key risk for the world economy, commodities and energy as well as electronics demand. Prior to the Covid-19 pandemic, China was the world’s most important source of international travellers, accounting for 20% of total spending in international tourism (US$255bil or RM1.2 trillion overseas and made 166 million overseas trips in 2019).
The stuttering China’s economic recovery amid property woes, weakening domestic consumption and slumping exports will have negative spillover effects on Malaysia via trade channel.
China has been Malaysia’s largest trading partner since 2009, with total trade share of 16.8% in the first half-year of 2023. China’s tourists are one of the major contributors to domestic tourism and related services.
In the first five months of 2023, Chinese tourists totalled 403,121 persons or 5.4% of total international tourists in Malaysia, and was only 12.9% of 3.1 million persons in 2019.
Malaysia’s exports have been on contraction mode for five successive months in July since March.
Exports moderating
Exports growth has moderated from strong double-digit rates (29.3% y-o-y in 2Q and 38.5% in 3Q22) to 3% in 1Q, and reversed to contract by 11.1% in 2Q and 13.1% in July 2023. With the still weakening global demand and low visibility of semiconductor sales as well as softening commodity prices, exports are expected to decline by 8% in 2023 (26.1% in 2022).
While consumer spending remains the strong point of the economy, consumers have normalised their spending and cautious discretionary spending are appearing. The strong private consumption growth story of 11.2% in 2022 was really turbo-charged by cash stimulus and the Covid-19 pandemic’s economic reopening effect. This had already started to taper off in 1H23, we expect this moderate pace of growth to continue normalising at 4.5% in 2H23.
Private consumption growth has slowed noticeably to 4.3% in 2Q23 (5.9% in 1Q23 and 7.3% in 4Q22) as higher prices of goods and services, elevated cost of living as well as the full weight of higher interest rates comes to bear. Several consumer spending indicators are starting to weaken: retail trade (5.1% y-o-y in 2Q vs 14.5% in 1Q), restaurants (1.6% in 2Q vs 3.7% in 1Q), hotels (49.0% in 2Q vs. 55.7% in 1Q), finance ( down 1.9% in 2Q vs. 2.8% in 1Q), insurance (down 13.4% in 2Q vs down 0.2% in 1Q), information and communication (3.6% in 2Q vs 3.8% in 1Q); suggesting that consumer-led slowdown may be on the way.
Stable labour market
Despite an economic slowdown, the labour market remains stable, which will continue to support domestic consumption. The unemployment rate reduced to 3.4% in June (581,700 persons), with the number of employed persons in the services sector (mainly in food and beverage services, wholesale and retail trade as well as transportation and storage activities), manufacturing, construction, mining and quarrying as well as agriculture sectors registering increases.
Nominal wages have slowed, and with still elevated prices of food and beverage as well as high cost of living along with the impact weakening ringgit, this has reduced the purchasing power of households. Private sector’s nominal wages continued to ease to 3.8% in 2Q23 (4.5% in 1Q) while real wages remained subdue (1% in 2Q vs 0.9% in 1Q).
Cautious mode
Growth of private investment improved slightly to 5.1% in 2Q (4.7% in 1Q23), taking the growth to 4.9% in 1H23. Cautious investment was due to concerns about global economy, weakening domestic demand amid increased business costs.
As the six state elections dust has settled, the government has to quickly implement the Madani Economy framework, New Industrial Master Plan (August) and National Energy Transition Roadmap to revitalise domestic and foreign direct investments in new catalytic and sources of growth and sectors.
These include electrical and electronics products, chemicals and petrochemicals, digital economy, aerospace, and pharmaceuticals (medical devices), electriv vehicles, renewable energy that could help enhance future production and exports of more complex and high value-added products.
Headline inflation has moderated but core inflation remains elevated relative to the long-term average amid lingering demand and cost factors. We caution that risks to the inflation outlook remain susceptible to core services inflation, domestic fuel subsidies rationalisation, global energy and food prices due to the impact of climate change.
We expect Bank Negara to keep domestic interest rate (as benchmarked by the overnight policy rate) at 3% for the rest of the year as concerns about economic and business conditions take precedence over inflation for now.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
