GDP growth to moderate to 4% in 2023

Maybank Research says signs of slowing growth emerging, taking cue from the downtrends in manufacturing PMI and monthly GDP tracker 


MALAYSIA’S economic growth is set to slow in 2023 to 4% as the global economy is expected to experience a mild recession next year amid stagnation or slowdown in major advanced economies on the impact of high inflation and high-interest rates, said Maybank Investment Banking Group Research (Maybank Research). 

With the first nine months of 2022 (9M22) real GDP growth of 9.3% year-on-year (YoY), Maybank Research expects the country’s full-year 2022 growth to come in at 8%, which arithmetically implies slower growth in the fourth quarter of 2022 (4Q22). 

The research house expects such laggard momentum to continue in 2023 and expect full-year growth to moderate to 4%. 

This, it said, is mainly reflecting moderation in domestic demand, particularly on the back of slower growth in private consumption as pent-up spending following the full economic reopening dissipates. It is compounded by the effects of high inflation and high-interest rates on cost of living and real/ disposable income, and moderation in public consumption growth in line with the lower government operating expenditure allocation in Budget 2023. 

Maybank Research noted that the ongoing and outlook of global economic downturn results in growth of exports and imports of goods and services slumping next year, plus the growth-deductive impact of inventory correction in 2023 after the growth-accretive effect of inventory buildups in 2021-2022. 

Emerging Signs of Growth Slowdown

In a recent report titled “Malaysia 2023 Outlook and Lookouts”, the research firm said growth-wise, the domestic economy had a good run since the 4Q21 when real GDP rebounded 3.6% YoY from the 4.5% YoY contraction in 3Q21, which was due to another lockdown following the Delta variant outbreak. 

Growth continued to accelerate in 9M22 as quarterly GDP surged to 14.2% YoY in 3Q22, partly on low base effect from 3Q21 contraction, from 5% YoY in 1Q22 and 8.9% YoY in 2Q22. This was due to the unwinding of movement restrictions and containment measures amid progress in vaccinations that culminated into full economic reopening from April 1 last year. 

“However, we are seeing signs of slowing growth emerging, taking cue from the downtrends in Malaysia’s manufacturing Purchasing Managers Index (PMI) and our monthly GDP tracker which signal reversal in growth momentum. To note, the correlation coefficient between monthly real GDP growth and monthly manufacturing PMI is high at +0.86,” said Maybank Research. 

It noted that Malaysia’s external trade growth, namely its external trade volume, is beginning to drift lower as the effect of slowing global economic growth starts to kick in. 

“In particular, exports volume fell 1% YoY in October 2022 — the first decline since the 8.3% YoY drop in July 2021 (ie when the economy went into another round of lockdown as mentioned earlier), pointing to weakening external demand. 

“However, import volume remained resilient, albeit posting the second consecutive month of slower double-digit growth of 17.2% YoY in October 2022, down from 20.4% YoY in September 2022 and the record high of 52.5% YoY in August 2022, indicating continued expansion in domestic demand,” it said. 

Maybank Research said signs of slowing consumer spending growth are also emerging. 

“The weighted average of retail and motor vehicle trade index (ie sales volume) — that we use as proxy for the real private consumption expenditure component of GDP (60% of GDP) — posted slowing double-digit growth pace ie 17.9% YoY in October 2022 versus 30.2% YoY in September 2022 and a high of 61.6% YoY in June 2022,” it said. 

Mitigation to Downsides on Growth – Crossing the T’s

Maybank Research reckons economic growth to moderate in 4Q22 and 2023, given global economic downturn spearheaded by major economies and the dampening effect of “high inflation-high interest rates”. 

However, it said mitigating the downside for Malaysia will be, among others, the continued drawdown of household or individual excess savings built up over the pandemic years (ie pent-up demand); ongoing tourism recovery with potential China reopen- ing a clear upside risk/accelerator; investment growth momentum supported by robust approved foreign direct investment (FDI) translating into rising actual FDI; ongoing and new infrastructure including digital and green projects; and lastly, Bank Negara Malaysia’s (BNM) monetary policy which the research house assumes to be “neutral” rather than “restrictive”. 

Terminal OPR at ‘Neutral’ 

After four successive rounds of 25 basis points (bps) hikes from 

a record low of 1.75% to 2.75% between May 2022 and November 2022, Maybank Research expects BNM to raise its Overnight Policy Rate (OPR) by another 25bps at the Jan 18-19, 2023, Monetary Policy Committee (MPC) meeting. 

This, it said, will restore OPR to its immediate pre-Covid-19 level of 3%, which it expects to remain for the rest of 2023. 

The “gradual and measured” OPR hikes mentioned by BNM reflect the shift in monetary policy stance from “accommodative” to “neutral”, rather than to “restrictive” like the outlook for major central banks’ interest rates. 

This, Maybank Research said, is as BNM seeks to strike a balance between addressing inflation and supporting growth. Furthermore, current trends of inflation rate and inflation drivers like wages and salaries are consistent with at least 3% OPR, in relation to their past levels. 

At the same time, the recent improvement in ringgit versus US dollar (USD) movement eases the pressure on BNM’s interest rate policy vis-à-vis that of the US Federal Reserve (Fed). “Our FX Research Team sees ringgit strengthening vs USD to 4.05 by end-2023 (end-2022E: 4.45),” it said. 

Drawdown of Excess Thrift

Maybank Research also expects mitigation to growth downside risk to come from the drawdown of excess savings — based on individual savings and demand deposits in the banking system — that were built up since 2020 due to lockdowns and economic stimulus measures such as cash handouts, financial aids and the four rounds of pre-retirement Employees’ Provident Fund (EPF) withdrawal schemes namely i-Sinar, i-Lestari, i-Citra and Special Withdrawal. 

“The rise in excess savings between January 2020 and April 2022 has reversed into drawdowns of excess savings since May 2022. This provides a buffer and support to consumer spending amid the impact of high inflation, OPR uplift and rising cost of living on real disposable income,” it noted. 

Tourism Recovery to Extend Reopening Tailwinds

Maybank Research said the economy also benefitted from the full economic reopening in 2022 as seen in the surge in quarterly real GDP growth in 9M22, among others propelled by the normalisation in daily commutes and pent-up domestic tourism and travel. 

“We expect the reopening tailwinds in 2023 to be sustained and driven by the strengthening recovery momentum in international/ inbound tourism, and the positive spillover to the broader economy, especially given the prospect of rebound in the industry’s shares of GDP, jobs and exports towards the levels back in 2019 after the slumps in 2020-2021. 

“An earlier and faster than expected China’s economic reopen- ing will be an added boost to tourism recovery outlook,” it said. 


Technology-Driven Investment Growth

The research house noted that after the all-time high total approved private sector investments of RM309 billion in 2021, the figure remained robust in the first half of 2022 (1H22) at RM123 billion, signalling a sustained positive outlook for actual/realised private investment growth. 

The main driver, it said, is the approved FDI, given the record amount of RM209 billion in 2021 and RM87 billion in 1H22 that surpassed the pre-2021 annual figures, paving the way for another bumper year in approved FDI. 

More importantly, it said that the approved FDI trend translated into the rise in 2021-9M22 actual or realised FDI. 

“Furthermore, the approved FDI in 2021-1H22 is underpinned by the technology-related sectors, ie approved FDI projects in electronics & electrical (which accounted for RM164.6 billion or 55.6% of approved FDI in 2021-1H22) and telecommunications (1H22: RM46.1 billion versus 2020-2021: RM1.55 billion per annum; RM47.9 billion or 16.2% of approved FDI in 2021-1H22). 

This, it noted, was on the back of some “mega” capex by global electronics players (eg RM30 billion by Intel Corp; RM8.35 bil by Infineon Technologies AG) and FDI surge in data centres (eg China’s Bridge Data Centres, ByteDance Ltd and GDS; US’s Microsoft Corp, Japan’s NTT and Taiwan’s Wiwynn Corp). 

The technology-driven investment growth is also bolstered by domestic public and private sector capex for 5G infrastructure rollout, as well as for automation and digitalisation. 

Wildcards – A Couple of Things Post-GE15

Inflation outlook: While Maybank Research maintained its 2022 inflation rate projection at 3.3%, it revised downward the 2023 inflation forecast to 3% from 4% previously, pending clarity on the new government’s policy on subsidy and the re-tabling of Budget 2023 in the 1Q23. 

Of note, Budget 2023 — which was tabled on Oct 7, 2022, before the Parliament was dissolved on Oct 10, 2022, to make way for the 15th General Election (GE15) on Nov 19, 2022 — hinted at fuel subsidy rationalisation via targeted mechanism versus current blanket system. 

It said this can be seen from the proposal to cut the allocation for “Subsidy and Social Assistances” by 28.7% to RM42 billion in 2023, from RM58.9 billion in 2022. 

Maybank Research noted that the subsidy for electricity bills as part to the economic stimulus package comes from the RM110 billion Covid-19 Fund, which is running out as the amount left for use in 2023 is just RM5 billion after the RM104.5 billion utilised in 2020-2022. 

“Our previous 2023 inflation forecast factored in the assumption of some gradual adjustments in fuel prices and electricity tariffs on subsidy reviews,” it said 

Medium-term fiscal policy stance: Maybank Research also took note of the “populist” GE15 manifestos of Pakatan Harapan (PH) and Barisan Nasional (BN) that represent the core of the new coalition government. 

These included measures to address the cost of living, welfare and social security/ protection issues; pledges of education sector “goodies”; promises of better deals for rural areas and less-developed states, especially Sabah and Sarawak; raising budget allocation for healthcare to 5% of GDP over the medium term from 1.8% in Budget 2023; as well as a plethora of tax cuts and reliefs. 

However, the research house said there are no details and explanations on how to finance these measures, namely whether they will involve tax measures like raising existing taxes, or will there be a trade-off in government expenditure or will there be higher borrowings at a time when the government’s domestic debt is not far off the statutory limit of 65% of GDP. 

“So, the government’s medium-term fiscal policy will be key to watch. To recap, the current medium-term fiscal target is to reduce the budget deficit to 3.5% of GDP by 2025 (2022E: 5.8% of GDP, Budget 2023: 5.5% of GDP),” it remarked. 

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