Both fiscal and monetary policies would remain supportive of the economy.
AMID slowing global economic growth and rising interest rates globally, the economy has succumbed to the impact of declining exports and slowing domestic demand, growing by 3.9% in the first nine months of 2023.
Headline inflation has moderated from the peak while core inflation also eased.
With incipient signs of exports contraction bottoming out (smaller rate of declines) and stronger revival in tourism, real gross domestic product (GDP) growth will gain further traction to an estimated 3.7% to 4% (3.3% in the third quarter or 3Q and 2.9% in 2Q), bringing the full-year estimate to about 4% in 2023 (8.7% in 2022).
We estimate domestic economic growth to expand by 4.5% in 2024, aided by a recovery in exports and continued growth in domestic demand, albeit cautiously. Domestic demand will contribute 4.3 percentage points to GDP growth while exports of goods and services will contribute 1.4 percentage points.
Both fiscal and monetary policies would remain supportive of the economy.
We estimate exports to recover gradually to 4% in 2024, a turnaround from an estimated decline of 7.4% in 2023.
The positive factors underpinning our exports outlook are improving global demand, a recovery in the tech downturn cycle, and increasing demand for chips for electric vehicles (EVs), artificial intelligence (AI) and the fifth-generation (5G).
We forecast the global economy to muddle through a soft landing in 2024, albeit macro risks still remaining.
These include elevated trade tensions between the United States and China, the ongoing conflict in Ukraine and the recent outbreak of war between Israel and Hamas in the Middle East.
Some leading indicators – purchasing managers’ index for manufacturing (49.3 in November 2023 vs 48.80 in October) and services (52.7 in November vs 51.8 in October) – have been improving while the global semiconductor prolonged downturn has bottomed out.
With sequential integrated circuits sales declines beginning to moderate, the global semiconductor industry appears to be nearing the end of a downcycle and is expected to begin recovering in 2024.
What further drives the semiconductor industry and chips demand is the gaining popularity of EVs, AI and the 5G network, all of which required some form of chips.
The 2024 budget’s budgetary operations are expected to provide moderate fiscal support to the economy through the development expenditure allocation of RM90bil. The fiscal deficit will reduce to RM85.4bil or 4.3% of GDP in 2024 from an estimated deficit of RM93.2bil or 5% of GDP in 2023.
There were allocations for industrial development, green investment, road construction and maintenance, public infrastructure and utilities, flood mitigation projects, building of schools and public housing development.
Discretionary spending
We expect households and consumers to be cautious in their discretionary spending. Private consumption growth has normalised to an estimated 5.3% growth in 2023 and will grow by 4.6% in 2024 (11.2% in 2022; 7.1% per year in 2011-2019).
There are numerous reasons to expect consumer spending growth to slow in 2024: targeted subsidy rationalisation, the high cost of living and inflation risk, as well as higher service tax rate for some services.
Tight labour market conditions (estimated unemployment rate at 3.3% in 2024, estimated 3.4% at end-December 2023) continue to support employment and income levels (average increment of 5.1% in 2024 as surveyed).
We look to higher private investment growth in 2024, supported by some realisation of approved investments averaging RM288.6bil per year in 2021-2022 and RM225bil in January-September 2023, mainly in the electronics and electrical products, AI, technology, transport equipment, and information and communications subsectors.
Catalysts to drive foreign direct investment and domestic direct investment will come from the implementation of the New Industrial Master Plan 2030, the National Energy Transition Roadmap and the Mid-Term Review of the 12th Malaysia Plan or 12MP (2021-2025).
We see a number of factors that could dampen business investments: the implementation of subsidy rationalisation in phases, concerns about business costs pressure; the impact of the weakening ringgit on imported raw materials as well as machinery and equipment.
In addition, the implementation of the progressive wage model and multi-tiered levy would mean increased employment cost.
Costs associated with the environmental, social and governance-compliance and climate change-induced disruptions could restrain small and medium enterprises to undertake investment.
Considering the cross currents, we expect private investment to increase by 5.5% in 2024 from an estimated 4.6% in 2023 (7.2% in 2022), but still below 8.8% per year in 2011-2019.
The key drivers of our estimated GDP growth of 4.5% in 2024 will be primarily driven by the services sector (estimated 5.5% in 2024 vs 5.3% in 2023), underpinned by sustained domestic consumption supporting the retailing, restaurants, accommodation and communication segments.
We expect free-visa entry for China, India and several Middle Eastern countries starting December 2023 to boost stronger revival in the tourism segment in 2024 and beyond.
In the first nine months of 2023, Malaysia recorded a total of 14 million tourist arrivals, and the government has revised the tourism target to 19.1 million by end-2023, from 16.1 million previously.
For 2024, we expect international tourists to reach 24 million, and the government is likely to revise the 26.1 million tourists target set for the 2026 Visit Malaysia Year.
Manufacturing cheer
The manufacturing sector is poised to improve further (estimated 4% in 2024 vs 1.3% in 2023), thanks to a gradual recovery in external demand for electronics and electrical products, chemical and chemical products, and refined petroleum products.
Domestic-market oriented industries will be backed by higher output in transport equipment and construction-related segments, in line with continued growth in consumption and investment.
We expect continued higher growth in the construction sector (estimated 7.2% in 2024 vs 6.5% in 2023), underpinned by strategic infrastructure and utilities projects, include ongoing projects, eg, the Central Spine Road, Pan Borneo Sabah Highway and the acceleration of projects under the 12MP as well as the development of affordable public and private housing.
Over the medium term, the construction sector will be supported by:
> The construction of public infrastructure: LRT Pulau Pinang to Seberang Perai (RM10bil), and the reinstatement of five cancelled LRT stations in the Klang Valley (RM4.7bil),
> The RM2.5bil for public housing development,
> Road maintenance and building: Federal roads and bridges (RM2.8bil); building and upgrading village roads (RM1.63bil), and the widening of the PLUS highway from Sedenak to Simpang Renggam (RM931mil), and
> Others: The construction of 33 high priority flood mitigation projects (RM11.8bil); the building of 26 new schools (RM2.6bil); building, maintaining and refurbishing the quarters of civil servants (RM2.4bil); the supply of water to 5,150 households and electricity to 2,200 households (RM939mil), and the construction of the USM teaching hospital (RM938mil).
Both headline and core inflation have moderated significantly to an average of 2.5% and 3.2% respectively, in January-November 2023, mainly due to easing cost of living measures such as menu Rahmah and continued subsidies and price controls for rice, eggs, sugar, flour and cooking oil as well as slower prices of transportation.
While food prices have eased, services inflation remained high.
Inflation is expected to increase higher to 2.8% to 3.5% in 2024 (estimated 2.5% in 2023).
A number of factors could add to inflation risk.
These include the government’s intention to review price controls and subsidies which will affect the inflation outlook and demand conditions; a gradual shift towards targeted subsidy mechanism starting in 1Q of 2024, and the expansion of the service tax (includes logistics, brokerages, underwriting and karaoke services) with rate increases to 8% from 6% (excluding food and beverages, telecommunication services, parking and logistic services).
Also included are risks from fluctuations in exchange rates and supply-related factors, such as global commodity prices, geopolitical uncertainties and climatic conditions.
We expect Bank Negara to keep the overnight policy rate steady at 3% throughout 2024 amid upside risks to inflation as the government contemplates revising subsidies and price controls.
Bank Negara does not normally react to cost-pushed inflation unless it sets off demand pressures due to wage-price spiral.
The central bank is unlikely to loosen monetary policy as this might risk destabilising the ringgit.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
