With the economy already locked in an average growth of 5.1% in 1H24, we revise 2024’s full-year GDP growth estimate to 5.4% from 4.5% previously.
GROWTH in the Malaysian economy continues to come in above expectations.
The second quarter of 2024 (2Q24) gross domestic product (GDP) growth of 5.9% year-on-year (y-o-y) (4.2% in 1Q) indicates optimism for the economy, supported by resilient consumer spending, sustained high business investments, and improved exports.
The 2Q24 GDP, which marks the strongest performance since 3Q17 will likely to peak, though the y-o-y growth will average 5.7% in 2H24 (5.1% in 1H24).
With the economy already locked in an average growth of 5.1% in 1H24, we revise 2024’s full-year GDP growth estimate to 5.4% from 4.5% previously.
For 2025, we forecast real GDP growth to sustain at a healthy clip of 5.0%, reflecting a continued pace of domestic demand, higher private investment and better exports.
We expect the government to up its 2024’s GDP growth estimate to between 5% and 5.5% from 4% and 5% currently, as well as introduce 5% and 6% for 2025 when tabling the 2025 Budget on Oct 18.
Our baseline scenario is still positive in the near to medium term.
Consumer spending continues to chalk up higher growth of 6.0% in 2Q (4.7% in 1Q), due to the Aidilfitri celebration spending, targeting regular payment of cash assistance, and the withdrawals of RM9.6bil from the Employees Provident Fund (EPF) Flexible Account 3 by 3.6 million or 27.5% of total 13.1 million EPF members as of Aug 12 (RM8.9bil as of July 19 and RM7bil as of June 10).
Stable labour market conditions will support consumer spending amid rising cost of living and price pressures. The unemployment rate is holding steady at 3.3% at 2Q24, and the labour force participation rate hit a record high of 70.5% in 2Q24.
However, nominal wage growth continued to grow marginally in the manufacturing sector (0.4% in 2Q compared with 0.7% in 1Q) and services sector (1.8% in 2Q and 1.6% in 1Q). After adjusting for inflation, real wages were negative for both sectors.Our base case is consumer spending growth should continue at a decent clip, supported by:
> The civil servants’ new pay scheme with an average salary increment between 16.8% and 42.7% (compounding effects) for 1.7 million civil servants (10.2% of total employment) to be implemented in two phases (December 2024 and January 2026), costing RM10bil. > Continued withdrawals from the EPF Flexible Account 3
> The impending implementation of new minimum wage (currently at RM1,500 per month) and the pilot run of Progressive Wage Model and
> Continued quarterly payment of financial assistance to targeted households and individuals. The anticipated implementation of subsidies rationalisation for RON95 is expected to temper spending somewhat amid inflationary risk.
Capital spending by the private sector in the form of machinery and equipment, structure and other assets continued to expand further by 12% in 2Q (9.2% in 1Q), reflecting investors and businesses’ optimism on growth and investment prospects ahead.
Nevertheless, the ACCCIM M-BECS results indicated that increasing cost of doing business remained a key concern, especially for the small and medium enterprises. It is observed that the increase in prices of raw materials, utility costs, employment cost, as well as rent and logistic costs, being the costs that impacted businesses the most.
In addition to the retargeting subsidies rationalisation for diesel, businesses are anxious about the implementation of e-invoicing for the large companies with an annual turnover or revenue exceeding RM100mil starting Aug 1, 2024. From Jan 1, 2025, it will extend to taxpayers with annual turnovers or revenues ranging from more than RM25mil to RM100mil.
Finally, by July 1, 2025, e-invoicing will become mandatory for all taxpayers in Malaysia, regardless of their annual turnover or revenue.
We strongly believe that private investment remains firmly on an upturn estimated between 10.0% and 13.5% in 2024-2026, underpinned by:
> Ongoing implementation of multi-year infrastructure projects,> Realisation of some approved investments in 2021-2023 and in 2024. For the period 2021-2023, on average, the annual implementation showed that more than 85% of approved manufacturing projects have been implemented. Total approved investment amounted to RM906.6bil in 2021-2023 and RM84bil in Q1 2024 and,
> Continued capacity expansions and new investment in the manufacturing sector (semiconductors, transport equipment, chemical and chemical products) and services (renewable energy, information and communications technology, data centres as well as technology related fields).
Several national strategic plans, namely the New Industrial Master Plan 2030, National Energy Transition Roadmap, the Mid-Term Review of the 12th Malaysia Plan (2021-2025), and National Semiconductor Strategy are gradually materialising and will be the catalyst for higher investment growth ahead.
The finalisation of Johor-Singapore Special Economic Zone deal between 4Q24 and 1Q25 will be a game changer to support investment growth going forward.
With a plethora of investments streaming in from multinationals like Google, Microsoft, ByteDance and Infineon, Malaysia will experience a global tech upcycle, especially where semiconductors, digital infrastructure like artificial intelligence, cloud computing, electric vehicles are concerned.
Exports, which expanded by 5.1% y-o-y in the first seven months of 2024, should remain firmly on positive track in 2024 (estimated full-year at 6.0%, revised from 4.0% previously). Underpinning exports are higher external demand, global tech upcycle and firmer commodity and energy prices.
The GDP expansion is broad-based across all economic sectors, with the construction sector registering the strongest growth rate (17.3% in 2Q compared with 11.9% in 1Q), followed by agriculture (7.2% in 2Q compared with 1.7% in 1Q), services (5.9% in 2Q compared with. 4.8% in 1Q), manufacturing (4.7% in 2Q compared with. 1.9% in 1Q) and mining sector (2.7% in 2Q compared with 5.7% in 1Q).Strong optimism
We maintain strong optimism on the construction sector in the near-to medium-term on the back of a strong pipeline of development and infrastructure projects, in addition to rising demand for industrial buildings:
> Higher construction projects awarded amounting to RM101.2bil in 1H24,
> Continued residential, industrial and commercial properties development projects and
> Anticipated projects including the Penang Light Rail Transit Mutiara Line, the remaining packages of Pan Borneo Highway Sabah phase 1B, and phase two of Pan Borneo Highway Sarawak, flood mitigation projects, and new data centres across Selangor and Johor and
> The final approvals of other mega projects such as Mass Rapid Transit 3, the Kuala Lumpur-Singapore High Speed Rail, and Bandar Malaysia, probably in 4Q24 and 1H25.
Growth in the services sector will be underpinned by the expansion of trade and business activities, consumption-and tourism-driven services, financial services, information and communication technology services as well as data centres services.
In 2023, digital economy contributed about 23.5% to GDP.
Malaysia aims to bring that up to 25.5% of GDP in 2025.
The manufacturing sector will remain firm, supported by continued recovery in production and exports of electronics and electrical products, chemical-based products, building materials, transport equipment and food production.
Bank Negara maintained its headline inflation estimate at between 2.0% and 3.5% in 2024 (core inflation at between 2.0% and 3.0%), citing inflation outlook remains subject to further domestic policy measures as well as risks from external developments. The balance of risk to inflation outlook in 2024 and 2025 are spillovers from subsidies rationalisation and price controls, volatile global commodity prices and higher input cost amid the ongoing geopolitical risks, weather disruptions and policy changes post the US presidential election.
Steady OPR at 3%
We expect Bank Negara to keep its overnight policy rate steady at 3.0% in 2024 and in 1H25, keeping a close watch on any signs of inflation risk, which could come from the public sector employees’ salary revision and higher minimum wage.
We see positive outlook for the ringgit against the US dollar (RM4.30 to RM4.40 at end-2024 and RM4.10 to RM4.20 at end-2025) given the improved economic growth and investment prospects and capital inflows, reinforced by the anticipated US rate easing path in 3Q24 and 4Q24 as well as in 2025.
However, the government must not let up on the economic and fiscal reforms to sustain the country’s competitiveness and attractiveness as a prime investment location.
While our baseline remains positive, we have to be mindful of downside risks to the global economy and its spillover effects on the domestic economy.
We see the following inter-related risks and issues: the geopolitical conflicts in the Ukraine and Gaza, which could escalate into wider regional conflicts, trade tariffs amongst the advanced economies, recessionary fears in the US economy and bumps on China’s recovery and persistent inflation amid volatile commodity prices and weather disruptions.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
