RHB Research cautiously optimistic on Malaysia’s outlook in 2023

Private consumption to remain the main driver of economic growth for 2023 


RHB Investment Bank Research is cautiously optimistic about the country’s outlook for 2023 and has maintained its GDP growth forecast at 4.5%. 

“Our outlook for next year remains cautiously optimistic, supported by resilient domestic demand,” the research house said in its 2023 outlook report titled ‘Recession fears over-done, we are bullish’ today. 

RHB Research expects private consumption to remain the main driver of economic growth for 2023 but warned that headwinds from both external and domestic fronts are likely to weigh on the economy, especially in the first half of 2023 (1H23). 

On the external front, it said slower growth of major economies, namely China, EU and the US, are likely to affect Malaysia’s trade performance. On the domestic front, issues of limited fiscal space, elevated living costs and labour shortages are likely to persist, it said. 

On the fiscal side, despite a record-high development expenditure allocation, implementation remained uncertain. 

Private Consumption to Remain Robust

RHB Research said consumer spending would be anchored by three key factors, namely: i) stable labour market conditions with the unemployment rate to average at 4% for the year; ii) improvement in overall incomes supported by a vibrant services sector; and iii) continued policy support by the government. 

“As a result, we project private consumption to stay resilient at 5.8% YoY,” it said. 

Despite the consumption recovery, it noted that rising living costs, however, remain an issue. 

“Food prices remain elevated amid supply chain issues. We expect some policy support from the government, especially to the vulnerable population in the form of cash transfers,” it said. 

Investment spending is expected to stay robust with expansion from both private and public investment. 

RHB Research believes that an increased capital spending in technology-intensive manufacturing and services sectors, particularly ICT-related machinery and equipment, is likely to provide some support to private investment spending. 

Meanwhile, it noted that public investment would be lifted by the continuation of large-scale transport-related projects such as the East Coast Rail Line, Light Rail Transit 3 and the Johor Bahru-Singapore Rapid Transit System Link. 

“We will remain watchful on any potential changes to the infrastructure project plans, on which we expect more clarity following the re-tabling of Budget 2023,” it said. 

Exports are likely to grow at a softer pace. 

“We stay cautious on the outlook for trade in real terms in the next three to six months as global growth is on a slowing path to trend,” it remarked. 

Weakness in electrical and electronics and commodity-based product exports might become more pronounced in 1H23 following the moderation in global demand. 

However, the research firm anticipates some improvements in trade performance by 2H23, in tandem with the recovery in the global economy. 

CPI Inflation Projection at 3%

RHB Research expects the country’s inflation trajectory to continue to be driven by the momentum of economic growth, the outlook for fuel subsidies, and the movement of commodity prices. 

“Following the changes in government regime, we keep our eye on any potential changes in fuel subsidies as their and the impact on the inflationary trajectory. We expect some slight relief from the supply side amid softening commodity prices in recent months. 

However, it believes that the demand-side pressures on core consumer price index (CPI) inflation are likely to stay intact in the next few months as its proprietary model suggests that consumer spending will remain robust in the near future albeit at a slower momentum. 

“Based on recent developments, we see limited risks of a significant deterioration in labour market conditions,” it said. 

Current account balance projected at 2.7% of GDP. 

RHB Research expects a moderation in both exports and imports in 1H23 following slower global and domestic economic activities. 

A higher goods surplus is, however, expected in 2H23 following a recovery in global growth and improvement in trade performance. 

“We also project smaller outflows in the services account, supported mainly by higher earnings from travelling and transportation activities,” it said. 

It noted that a higher deficit in the secondary income account might be expected owing to larger remittances by foreign workers following the normalisation of economic activities and the revision of the minimum wage. 

Maintain 2023 fiscal deficit projection at 5.5% of GDP. 

Following the revision and re-tabling of Budget 2023, a few key areas would remain under RHB Research focus, namely the rationalisation of government expenditure, any potential revision in project spending as well as the discussion on revenue resources under the new administration. 

“We expect some rationalisation in operating expenditure, and a more targeted approach towards subsidies might be implemented,” it said. 

In view of still-elevated living costs and inflationary pressures, RHB Research believes the adjustment pace is likely to be gradual. 

“Potential revision of the development expenditure (DE) allocation might be possible, especially for new and existing projects that have yet to start the tender process. 

Any major changes to Budget 2023 might have a significant impact on our fiscal deficit projection,” it said. 

OPR Expected to Peak at 3%-3.5%

RHB Research maintains its Overnight Policy Rate (OPR) forecast range of 3%-3.5% for 2023, anchored by a few key factors namely, a robust domestic economy, resilient inflationary pressures, and potential fuel subsidy relaxation. 

On the domestic front, it noted that the frontloading of OPR hikes is necessary to keep inflation risks at bay amid a resilient economic performance. 

“Robust domestic demand, coupled with negative real interest rates, would continue to fuel the core inflation pressures in the upcoming months. The external pressure from continued monetary tightening by the US Federal Reserve implies that OPR normalisation would likely continue in 1H23,” it said.

  • This article first appeared in The Malaysian Reserve weekly print edition