Experts lower Malaysia’s 2023 GDP projections amid global pressures

This downward revision comes as a disappointment in the face of earlier optimism, as the 2Q GDP results were below consensus expectations

by RUPINDER SINGH / pic MUHD AMIN NAHARUL

ECONOMISTS are lowering their growth projections for Malaysia’s GDP for the year 2023, citing a combination of domestic and external factors that have collectively contributed to the country’s economic headwinds.

This downward revision comes as a disappointment in the face of earlier optimism, as the second quarter (2Q) GDP results were below consensus expectations.

Latest 2Q GDP Data: A Reality Check

The latest data unveiled by UOB Global Economics & Markets Research, Bloomberg and OCBC Treasury Research paint a collective picture of a Malaysian economy that is slowing down.

The second quarter of 2023 (2Q23) saw Malaysia’s GDP growth rate drop to a mere 2.9% year-on-year, marking a significant decline from the robust 5.6% growth registered in 1Q.

UOB Research points to the adverse base effect from the previous year as a significant contributor to this slowdown.

Its report underscores that this factor has exerted a substantial downward pressure on growth rates, despite positive indicators such as labour market improvements and sustained domestic demand.

“Its 2Q23’s GDP growth remained supported by labour market improvements, sustained increase in domestic demand, and higher tourism activities,” UOB Research said.

However, it noted that this momentum has been tempered by the global tech down cycle and weaker external demand.

Bloomberg’s Asean economist, Tamara Mast Henderson, echoes this sentiment by stating that the Malaysian economy’s growth trajectory in the first half of the year has been marked by a broader deceleration.

“The pace of growth is the slowest since 3Q21 albeit largely weighed down by a high base effect from last year” she states.

This deceleration, she noted, is attributed in part to the normalisation of economic conditions following the initial post-pandemic boom.

As the initial reopening effect subsides and external demand weakens, she said it is anticipated that further economic slowing may ensue.

Forecasts Under Scrutiny: A Closer Examination

In response to the recent data, analysts have begun revising their GDP growth forecasts for Malaysia.

UOB Research has adjusted its 2023 full-year GDP forecast from 4.4% to 4%, aligning it with the emerging trend of lower growth rates.

Similarly, OCBC Treasury Research has downwardly revised its projections, estimating a growth rate of 4.2% for 2023, down from its earlier forecast of 4.5%.

“We reduce our 2023 GDP growth forecast to 4% YoY from 4.4% previously. This reflects the weaker-than-expected 1H23 outturn of 4.2%.

“Our 2H23 growth forecast remains unchanged at 3.7% reflecting a bigger drag from anaemic external demand conditions.

“Our full year 2023 forecast is now at the low end of BNM’s 4%-5% forecast range for the year. “For 2024, we lower our GDP growth forecast to 4.2% from 4.5%, previously, as the drag from global growth is expected to persist. This nonetheless underscores an improvement in growth momentum relative to 2023,” it said.

The significance of these downward revisions underscores the multifaceted challenges that the Malaysian economy is grappling with.

OCBC Treasury Research report highlights the weaker-than-expected growth in the first half of 2023 as a key driver for the adjusted growth forecasts.

“We reduce our 2023 GDP growth forecast to 4% from our previous forecast of 4.4%,” it said.

Moreover, it noted that the anticipation of a drag stemming from global growth headwinds and anaemic external demand adds to the cautious outlook.

Bloomberg’s expectation of a 3.7% GDP growth rate in 2023, as well as a further dip to 3% in 2024, introduces an additional dimension to the evolving narrative.

This projection reflects the complex interplay between internal and external factors shaping Malaysia’s economic landscape.

Sectoral Performance: A Complex Tapestry

A granular analysis of sectoral performance reveals the nuanced forces shaping Malaysia’s economic landscape.

UOB Research delves into sectors including services, manufacturing, construction and agriculture.

While the services and construction sectors have exhibited growth, manufacturing and agriculture have faced headwinds.

The contraction in exports, notably evident in the manufacturing sector, has dampened growth prospects.

Bloomberg report accentuates the varied drivers of GDP growth, highlighting the increasing role of the public sector in bolstering growth through enhanced consumption and investment spending.

It points out, “Positive gains were recorded for private consumption (+4.3%), private investment (+5.1%), public investment (+7.9%), and public consumption (+3.8%) while net exports contracted 3.7%.”

On the other hand, it noted that private consumption has slowed down, contributing to a narrower role for the private sector in economic expansion.

External Dynamics and Policy Implications

The economists from their respective reports collectively underscore the external pressures that are exerting influence on Malaysia’s economy.

The challenges posed by China’s economic strains are expected to reverberate through multiple channels, including lower commodity prices, decreased export volumes, and subdued consumer sentiment.

The extent of these impacts hinges on the effectiveness of China’s measures to address its economic challenges.

Global interest rate hikes, primarily in the United States and Europe, are an additional variable contributing to economic uncertainty.

While these rate hikes are poised to impact economies globally, Malaysia’s situation carries its own distinct intricacies.

Both OCBC Treasury Research and Bloomberg suggest that Bank Negara Malaysia is likely to maintain its current interest rates through 2023 and into 2024, in an effort to support economic growth against the backdrop of these challenges.

GDP Data and Current Account Surplus

In addition to the GDP data results, the current account surplus has widened in the second quarter of 2023, providing a glimmer of positive news amidst the challenging economic landscape.

OCBC Treasury Research notes that the current account surplus expanded to RM9.1 billion or 1.9% of GDP in 2Q23, up from RM4.3 billion or 1% in the previous quarter.

This growth was primarily driven by narrower deficits in the services and primary income balance.

It attributes the narrower services deficit to higher inbound tourist arrivals, suggesting a positive contribution from the tourism sector despite the overall economic headwinds. Furthermore, the increase in investment income from abroad played a role in offsetting the narrowed goods trade balance, demonstrating the interconnectedness of global economic flows.

Governor Datuk Abdul Rasheed Ghaffour’s perspective is crucial in this context.

For the remainder of 2023, he expects growth to remain moderate amidst external headwinds.

However, resilient domestic demand, employment improvements, income growth, and the implementation of multi-year projects are expected to support growth. Tourist arrivals are also anticipated to rise, lending support to tourism-related activities.

He highlights that “risks to Malaysia’s growth outlook are subject to downside risk stemming primarily from weaker than expected global growth. There are, however, upside risk factors such as stronger than expected tourism activity and faster implementation of projects.”

Meanwhile, the central bank’s Overnight Policy Rate (OPR) also warrants attention in this dynamic economic environment.

OCBC Treasury Research anticipates that, despite the downward revisions in GDP growth forecasts, the central bank will maintain its current monetary policy stance throughout 2023 and into 2024.

It points out that the central bank views the current policy rate level as slightly accommodative and supportive of growth.

Meanwhile, UOB Research said, “The downward revision in our 2023 GDP growth forecast further supports our call for the overnight policy rate (OPR) to stay unchanged at 3% for the rest of the year.

“An expected pause in the OPR would also aid rate-sensitive sectors such as durable goods sales, including auto and real estate in the near term,” it said.