PETALING JAYA: With global headwinds affecting the world economy, coupled with the disruption of shipping lanes, Malaysia as a trading nation is expected to feel the brunt of higher inflationary pressures this year.
The external headwinds which could potentially spur higher inflation are the escalation of the war between Israel and Hamas and its impact on the oil supply in the Middle East, and the avoidance of some sea routes which could impact transportation leading to higher consumer prices and food prices, particularly of staples, due to the ongoing El Nino phenomenon.
On the domestic front, the rollout of the targeted fuel subsidies may further fan inflationary pressures if it is implemented this year.
CNN recently reported that attacks by Iran-backed militants in the Red Sea, which connects with the Suez Canal, could snarl global supply chains and drive up the prices of manufactured goods at a crucial moment in the battle to defeat inflation.
The Suez Canal accounts for 10% to 15% of world trade (which includes oil exports) and 30% of global container shipping volumes.
The country’s headline inflation rate rose at a slower rate of 1.5% year-on-year (y-o-y) in November 2023 as compared to 1.8% in October and 1.9% in September in the same year. Core inflation stood at 2% for the month, still above the pre-Covid 19 pandemic average of 1.7%.
Core inflation measures changes in the prices of goods and services, excluding volatile prices of fresh food and energy prices.
The Statistics Department attributed the deceleration in the consumer price index, the measure for headline inflation, to a three-year low driven by the lower price increases in restaurants and hotels, food and non-alcoholic beverages and health.
Economists are anticipating the inflation rate to hover between 2.5% and 3.5% this year, but said it may spike if the external headwinds worsen.
OCBC Bank senior Asean economist Lavanya Venkateswaran.
OCBC Bank senior Asean economist Lavanya Venkateswaran told StarBiz inflationary pressures, while having eased since early 2023, remain sticky due to various factors.
Food prices, particularly of staples such as rice, have been elevated due to the ongoing El Nino phenomenon and policy changes from key exporters, she noted.
She said energy prices have been volatile due to the ongoing geopolitical tensions in the Middle East.
“The avoidance of the Red Sea shipping route by some of the major shipping companies could push up logistics and transportation costs, depending on the duration of the closure. Our baseline is for inflationary pressures to ease, albeit at a modest and uneven pace.
“For Malaysia, our baseline forecast is for headline inflation to average 2.5% y-o-y, similar to 2023. The implementation of targeted fuel subsidies will have an inflationary impact and is a key risk to our forecast, depending on the timing and mechanism of introduction,” Lavanya said.
Analysts also warn disruption of shipping lanes would increase unit costs that would translate to higher prices for consumers and logistics providers.
The growing threat of spillover from the Gaza war, especially the threat to international commercial shipping via the Red Sea route and the Suez Canal, has seen global carriers like Maersk suspend sailing through the route till further notice.
UCSI University Malaysia assistant professor of finance Liew Chee Yoong
UCSI University Malaysia assistant professor of finance Liew Chee Yoong expects inflation to remain a major concern in 2024 due to the potential external headwinds, with projections of a rate of within 2.5% to 3.5%.
In addition, he said the potential closure of sea routes due to geopolitical conflicts could increase inflation by disrupting supply chains and increasing transportation costs, hence, influencing the inflation rate in Malaysia.
However, Liew, who is also a research fellow at the Centre for Market Education, said improvements in domestic supply chains may mitigate the inflationary pressure.
“Continuous monitoring of the global economic environment, particularly in relation to trade and commodity markets, will be crucial for Malaysia this year.
“The government’s ability to respond swiftly and effectively to the potential external headwinds will be key to sustaining economic growth and stability,” he added.
Separately, Liew said the effectiveness of the government’s economic policies in strengthening the local economy would depend on their implementation and adaptability to changing economic conditions.
These policies need to focus on bolstering domestic demand, supporting key sectors and enhancing trade resilience, he noted.
Unitar International University economics professor and KSI Strategic Institute for Asia Pacific economic adviser Anthony Dass
Meanwhile, Unitar International University economics professor Anthony Dass, who is pencilling in an inflation rate of 2.8% for 2024, said inflationary pressure is expected to be manageable.
Furthermore, he said the fuel subsidy rationalisation and the adjustment in fuel prices would be gradual to mitigate the impact on inflation.
“A gradual appreciation of the ringgit against the US dollar would help ease import costs. Besides, increasing efficiency and productivity also helps mitigate rising costs of doing business from any upwards pressure arising from other areas.
“As for the ongoing geopolitical conflict, there is hardly any upward pressure on global oil prices for now.
“Should the conflict accelerate, there is limited upside on the global oil prices in part due to an imbalance between supply and demand and growing alternative energy.
“The current disruption on sea routes is more likely to be temporary as there are still talks to decelerate the war tension in the Middle East, “ said Dass, who is also an economic adviser at KSI Strategic Institute for Asia-Pacific.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
As to whether the domestic economy would be able to hold up the external headwinds and maintain its growth of 4% to 5% this year, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said it is achievable.
He said the existing resources, namely the available labour and capital, as well as the state of the technology, should be able to navigate the country’s economy towards such a trajectory.
“Our gross domestic product (GDP) projection for this year is 4.3% with domestic demand as the key driver for growth along with improvement in the net exports during the year. Sectors such as semiconductor, renewable energy, automotive, tourism and construction are some of the main industries that will drive the nation’s economy in 2024,” he noted.
Mohd Afzanizam is upbeat on the recent economic policies launched by the government, adding that they are meant to shape the country’s economy into something that is more sustainable, highly productive and more importantly, is able to create better paying jobs and business opportunities to the local entrepreneurs.
What matters now is the speed of the implementation and how it can benefit Malaysians, he said.
Dass said despite the geopolitical and economic risks, the local economy would improve and probably outperform expectations, noting that GDP this year could grow by 4.8% or even reach 5%.
He said rising real incomes would be one key driver and cooling inflation to settle at 2.8% in 2024 would improve households’ wallets.
“Fuel subsidy rationalisation and the adjustment in fuel prices would be gradual to mitigate the impact on inflation.
“Labour market to remain resilient from favourable business sentiments. The unemployment rate should be around 3.3% this year. Real wage growth would be around 2.5% to 3.5%, Dass said.
OCBC’s Lavanya said the global growth backdrop this year would be challenging. But, she said the bank is cautiously optimistic about Malaysia’s growth outlook, supported by stronger domestic fundamentals.
These include a stabilisation in household spending and a clear focus on investment spending, she noted.
“The bottoming out of the global electronics downcycle this year, by our forecasts, should also help support growth. We forecast 2024 GDP growth of 4.2% versus 4% in 2023,” she said.
