OCBC Bank senior Asean economist Lavanya Venkateswaran
PETALING JAYA: Domestic consumer spending, a key economic driver, is expected to maintain resilience amid higher inflationary pressure and challenges.
Economists are projecting household spending to expand by 4% to 5% this year, which is a commendable growth although lower than the pre-Covid-19 pandemic growth rate of 7%.
However, economists and analysts concurred that the consumer spending trajectory would hinge on the implementation of targeted subsidies as they would potentially raise prices, leading to higher inflation and affect consumption.
Bank Negara is forecasting an inflation rate of between 2% and 3.5% this year, taking into account the phasing out of subsidies and price control adjustments. Inflation stood at 2.5% last year.
Headline inflation remained moderate at 1.7% in the first quarter of 2024 (1Q24) compared with 1.6% in 4Q23, while core inflation slowed to 1.8% from 2% in 4Q23.
Meanwhile, the economy grew at a higher rate of 4.2% in 1Q24 (4Q 2023: 2.9%), driven by stronger private expenditure and positive turnaround in exports.
HSBC Asean economist Yun Liu
HSBC Asean economist Yun Liu expects household spending to remain resilient this year, but at the same time, pointed out that there is a need to keep an eye on the details of the subsidy rationalisation, especially the scope and timing of the implementation.
She said inflation would remain largely in check for 2024 and is forecasting the rate to be at 2.2% this year.
However, the 2024 inflation trajectory would also be dependent on the implementation of the targeted subsidies, in terms of its timing and magnitude.
“Malaysia has seen much more benign inflation than its regional peers, largely thanks to its generous subsidies. But it raises the question of long-term fiscal sustainability, thus the government is shifting its focus from blanket subsidies to targeted ones,” Liu told StarBiz.
OCBC Bank senior Asean economist Lavanya Venkateswaran is projecting household consumption spending to remain resilient at around 4% growth for this year, albeit moderating from pre-pandemic growth rates of 7%.
Continued wage growth, changes to the Employees Provident Fund (EPF) structure to allow for more disposable income and cash handouts to mitigate the impact of targeted diesel subsidy rationalisation should support household spending, she said.
She said inflation would likely pick up in 2024 on account of stickier food prices and changes to the government’s fiscal policies.
“Our forecast is for headline inflation to average 2.5% year-on-year (y-o-y), within Bank Negara’s 2% to 3.5% forecast range for the year, and stable compared with 2023,” Lavanya noted.
Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid
Commenting on higher inflationary pressures, Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid said this would be the key concern in light of the policy changes in respect to subsidies.
“The impact of higher service tax from 6% to 8% has been quite minimal with inflation rate hovering around at 1.7% for the first four months of this year.
“However, the implementation subsidy rationalisation on diesel and RON95 might alter the inflation outlook for the rest of the year. As such, we shall expect inflation rate to be higher in the second half of 2024,” he added.
On rising costs, Afzanizam said the issue could be deemed a contemporary issue and it is not unique to Malaysia.
“When the cost of living is high, people would adjust to their spending by searching for cheaper alternatives. This could mean people might shop online as prices can be quite competitive especially for fashion and do-it-yourself products.”
Judging from the labour market condition, Afzanizam noted that the country is already in full employment status, which means that jobs are readily available.
“But it’s a question of quality and whether the jobs commensurate with the level of skills and qualification.
“On one hand, people have jobs and therefore they have an income that can be spent on goods and services.”
The other, said Afzanizam, is the quality of jobs – that is, whether the jobs pay well or at least, commensurate with their academic qualification.
“If we look at the demand for labour, it is very much skewed towards semi-skilled and low-skilled where in 1Q24, both categories accounted for 74.9% of total labour demand whereas skilled labour only forms 25.1%.
“Similarly, in terms of labour force by educational attainment, those with tertiary education accounted for 31.6% while secondary, primary and no formal education constituted 57.1%, 8.6% and 2.8% respectively in the 1Q24,” Afzanizam pointed out.
“The problems with regard to labour are structural in nature. Our economy has the potential to grow higher than what it is now should all our skilled labour be absorbed and paid in accordance to their skill and qualification,” he said.
UCSI University Malaysia associate professor of finance Liew Chee Yoong
UCSI University Malaysia associate professor of finance Liew Chee Yoong said household spending is projected to grow by 5% for 2024.
However, inflation could hinder growth, potentially slowing down domestic consumption.
“The inflation rate forecast for 2024 has been reduced downwards and this suggests a moderation in inflationary pressures compared with 2023, driven by easing supply chain disruptions and stable commodity prices,” said Liew, who is also a research fellow at the Centre for Market Education.
On the export front, he said there are significant global headwinds and uncertainties ahead for the rest of the year, which could reduce the growth in exports.
“The domestic economy showed resilience with a significant rebound in Q124. However, external factors such as global economic conditions and domestic policy adjustments still play crucial roles in shaping the economic outlook for the remainder of the year,” he added.
OCBC’s Lavanya expects export growth to improve for the rest of the year and for the pickup in the electronics and electrical exports to become more convincing in the second half of the year, as the global electronics export downcycle bottoms.
“We are maintaining our 2024 gross domestic product (GDP) growth forecast of 4.2% y-o-y. The risks to our forecasts are evenly balanced.
“Downside risks include geopolitical risks, a protracted slowdown in global electronics and unexpectedly tighter fiscal policy.
“On the upside, resilience in private consumption, expansion of government infrastructure projects and higher commodity prices could help growth,” she noted.
Meanwhile, HSBC’s Liu expects an improvement in the external demand to be the main driver of the country’s economic growth this year.
But for now, it has not seen a meaningful recovery in the electronics cycle.
According to Liu, Malaysia does not have direct exposure to artificial intelligence-powered chips.
“We expect the tech cycle to broaden out, boosting growth more in the second half of the year. HSBC expects economic growth to accelerate to 4.5% in 2024,” she said.
Bank Muamalat’s Afzanizam is projecting the economy to grow at 4.5% this year.
“Fiscal policy continues to remain expansionary as evidenced by the deficits target of 4.3% of GDP, which means that the government would continue to spend more than what it earns and a record high development expenditure would have direct spillover to key sectors namely construction, manufacturing and services.
“Also, the implementation of a flexible account for EPF members can provide a boost to consumer spending, given the high tendency for people to spend,” he said.
