Categories: EconomyNews

Malaysia to have weaker economic growth this year

The inflation rate, meanwhile, is expected to hover between 2.8% and 3%

by JUNE MOH / pic TMR FILE

MALAYSIA will see a weaker economic growth at a 4.1% estimated rate in 2023 from 8.5% in 2022, largely due to an interplay of weakening external environment, new government narratives, domestic inflation and interest rate hike. 

Socio-Economic Research Centre (SERC) highlighted that other factors affecting the growth are moderating exports, normalisation of domestic demand, dampening impacts of inflation and higher cost of living and the lagged effects of interest rate increases. 

SERC ED Lee Heng Guie explained further that exports moderation would reduce exports growth to 1.8% in 2023 from 26.5% in 2022 due to the dampening impact of weakening global demand, easing prices of energy and commodities, as well as challenges posed by high base effects. 

“The momentum for exports growth had softened between September to November 2022 due to weakening demand of major manufactured goods such as electronics and electrical products, chemical and chemical products, machinery, and lower crude oil and palm oil prices,” Lee told reporters at the briefing of Malaysia’s Quarterly Economy Tracker (October to December 2022) and 2023 Outlook. 

The report indicated a normalising domestic demand at a more sustainable pace while household spending is expected to normalise towards its medium-term growth trajectory in 2023 and 2024. 

“Consumer spending’s growth is moving to sustainable levels due to normalising post Covid-19 pent-up demand as cash assistance measures such as the RM145 billion Employees Provident Fund withdrawal and loan repayment assistance had ended. 

“Besides, purchasing power is declining due to the impact of rising inflation and higher cost of living. 

“In addition, higher interest rate (borrowing cost) for high debt borrowers means that consumers do not have much disposable income and must cut back on spending,” he said. 

The good news, he said, the labour market has improved to 3.6% as of end-October 2022 with the labour participation rate nearing pre-pandemic level. 

Private investment will grow by 4% in 2023 from 5.8% in 2022 due to continuing investment in the manufacturing sector and some sub-sectors in services industry, for example, the 5G network and green investment in the telecommunication segment. 

Malaysia’s inflation rate is expected to hover between 2.8% and 3% this year with headline inflation to increase between 2.8% and 3.3% in 2023 following stable commodity prices and a gradual move towards targeted subsidies mechanism.

“With government focus on tackling the impact of inflation and higher cost of living on the low- and middle-income households, we expect targeted subsidies rationalisation will be implemented at a measured pace.

“Meanwhile, we maintain our view that Bank Negara Malaysia will raise interest rate by an additional 50 basis points to its pre-Covid level at 3.25% in 2023 to safeguard macroeconomics stability,” he said. 

As such, Lee mentioned that the Unity Government has to ensure a stable and good governance political system and economic ecosystem, which is the key precondition to rebuild businesses and investors’ confidence.

“In a broader sense, both Pakatan Harapan’s and Barisan Nasional’s manifesto address and provide structural solutions for the rakyat’s concerns about immediate economic issues (cost of living, income and jobs), education, healthcare and climate change-related impact.

“At the same time, governance and institutional reforms also featured prominently, underscoring the importance of reforming political and public institutions to ensure effective governance, transparency and accountability of the new administration,” he said.

“Both manifestos have some notable common offerings though we believe that some initiatives can be implemented immediately, in particular concerning people-centric measures to ease the impact of inflation and higher cost of living on B40 households.

“We view positively the laid-out pledges to ensure good governance practices and to undertake institutional reforms. With a convincing two-thirds majority, we hope that the Unity Government can front-load as well as prioritise the implementation of governance and institutional reforms. Political reforms do not incur any fiscal costs compared to economic and social reforms.

“As the public and investors lack confidence and distrust, effective governance and credible institutional reforms are deemed critical to improving state institutional capacity as the precondition to build capable, transparent, efficient and trust, as well as confidence in government and public institutions.

“As institutions affect the economy through the creation of an environment necessary for economic growth, prosperity and development, the effectiveness of political and economic institutional reforms would not only have positive impact on economic growth but also increase the level of investment because it gives more confidence to investors and businessmen and the business environment is more competitive for economic potential,” he added.

He highlighted that while the US Federal Reserve (Fed) will shift to smaller magnitude of rate hikes (2023F: 5%-5.25% Fed funds rate), the higher interest rate level will stay longer throughout 2023 until the inflation risk is anchored and come down between 3% and 4%. 

“Geopolitical concerns surrounding the Russian-Ukraine conflict remain — will it come to an end or develop into a new round deepening rift?

“Geopolitical tensions between the US and China are likely to get more intense as both Democrat and Republican lawmakers will continue to up the ante in domestic policies to counteract China in the run up to the US Presidential Elections in 2024,” he said.

Zukri

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