World Bank forecasts Malaysia’s growth decreasing to 3.9% due to external demand slowdown


The World Bank is expecting Malaysia’s growth rate to decrease to 3.9%, owing mostly to a significant slowdown in external demand. 

In its Malaysia Macro Poverty Outlook report, it said while external challenges loom large, domestic demand in Malaysia is projected to play a critical role in maintaining the country’s economic resiliency.

Despite the positive characteristics of Malaysia’s economic prospects, the country has a restricted fiscal space, posing a major challenge that requires attention. 

Furthermore, nearly 490,000 Malaysian households are living below the national poverty line, indicating a slower recovery from the pandemic’s impact. 

This stark reality highlights the urgent need for improved social safety nets and the restoration of fiscal buffers to support the nation’s economic and social well-being.

Key conditions and challenges

Malaysia’s economic growth is predicted to moderate in 2023, against the backdrop of a global economic recession and lingering uncertainties. 

Despite efforts to recover from the pandemic, the country confronts a number of domestic difficulties that must be addressed.

One of the primary concerns is the shrinking fiscal space. Malaysia’s government is dealing with a shrinking tax base as well as rising expenditures, particularly for salaries, pensions and interest payments. 

This financial strain is worsened further by inefficiencies in spending, such as broad-based fuel subsidies and distortive pricing restrictions.

In response to these issues, the government recently unveiled the “Madani Economy,” a medium-term economic plan aiming at decreasing the fiscal deficit to 3% of GDP or less, of which, further information on subsidy reform plans will be released later this month during the tabling of Budget 2024.

Despite progress in post-pandemic recovery, Malaysia faces persistent challenges in poverty alleviation. 

According to government forecasts, the absolute poverty rate will be 6.2% in 2022, down from the pandemic-induced peak of 8.4% in 2020. 

However, this rate remained higher than the pre-pandemic average of 5.6% in 2019.

Absolute poverty increased in all states except the Federal Territories of Putrajaya and Labuan, while urban areas increased and rural areas decreased. 

The country has seen a reduction in economic disparity. According to official figures – the Gini index (which measures household gross income inequality), remained relatively consistent at 40.4% in 2022, compared to 40.7% in 2019.

Income disparity trends, on the other hand, differ across states. 

Notably, wealth disparity has increased in states such as Kelantan, Pulau Pinang and the Federal Territory of Kuala Lumpur.

Recent developments

Malaysia’s economic growth slowed in Q223, falling to 2.9% from a healthy 5.6% in 1Q23. 

The easing is mostly due to a slowing in foreign demand, which reflects the persistent challenges created by the global economic situation.

The slowdown in economic growth was compounded further by lower output in critical sectors such as Electrical and Electronics (E&E) and commodities. 

Furthermore, the high base effects from 2022 led to the slower growth in 2Q23.

Despite the challenges, Malaysia’s economy has continued to benefit from robust domestic demand. 

Household expenditure showed exceptional resiliency, owing largely to labour-market reforms. Private consumption increased significantly in 2Q23, with a growth rate of 4.3%.

Furthermore, the steady progress of multi-year infrastructure projects has offered critical support to investment activity, which increased by 5.1% over the same period. 

These continuing projects have been critical in stabilising economic activity and increasing investor confidence.

In addition to domestic considerations, increased tourist arrivals boosted tourism-related activity, further boosting economic growth.

The weaker external environment had a significant impact on Malaysia’s international trade, resulting in a slowdown overall. 

Gross exports and imports both fell by 9.4% in 2Q23. Imports fell mostly as a result of weakening intermediate imports. 

The manufacturing sector grew by 0.1% in 2Q23, a considerable decrease from the 3.2% expansion seen in 1Q23. This slowdown is mostly due to poor worldwide semiconductor sales.

On the financial front, Malaysia’s current account surplus increased to 2.1% of GDP in 1Q23. 

Higher earnings from travel receipts and foreign investment income helped offset a diminished goods surplus.

In a positive trend, Malaysia’s job market continued to improve, with the unemployment rate falling to 3.4% in June 2023. 

Furthermore, the labour force participation rate rose to 70.0%, indicating the employment market’s strength. Wage growth in the private sector, albeit decreasing slightly, remained strong in 2Q2023, at 3.8%.

In terms of inflation, Malaysian inflation fell to 2.0% in July 2023 – the lowest figure in nearly a year. 

Core inflation was likewise moderate, at 2.8%. The central bank expects headline inflation to remain low in the coming months, owing to lower cost components.

The central bank opted to keep the overnight policy rate (OPR) at 3.0% during its most recent monetary policy committee meeting in September – following a 25-basis-point rise in May 2023. 

The central bank stated that the current monetary policy stance is still beneficial to the economy as a whole.

Despite these economic trends, investor concerns regarding the slowing global growth have weighed on the Malaysian ringgit and the real effective exchange rate (REER). Notably, the ringgit depreciated by 5.4% in the first eight months of 2023.


According to forecasts, with an excellent growth rate of 8.7%, Malaysia’s robust economic rebound in 2022 is set to drop to 3.9% in 2023. 

This expected transition reflects the changing dynamics of the country’s economic landscape.

Domestic private sector expenditure is likely to be the key driver of the increase, indicating the robustness of Malaysia’s economic fundamentals. 

Private consumption is expected to grow at a rather robust 5.2% annual rate in 2023, according to forecasts. The upward trend is supported by improved labour market conditions and the government’s continued attempts to boost household income.

However, Malaysia’s export sector is projected to suffer difficulties in the coming year. 

Gross exports are expected to fall by 5.8%, a sharp contrast to the exceptional 14.5% growth seen in 2022. 

This decrease is related to lower global economic prospects and declining international trade momentum, both of which pose challenges to the country’s external trade performance.

Malaysia expects headline consumer price inflation will moderate to 2.5% to 3.0% in 2023, owing mostly to the reduction of global supply limitations and the stabilisation of commodity prices.

Despite the optimistic economic forecasts, Malaysia remains wary of external dangers that could derail its economic growth. 

Deeper global growth shocks may cause a more substantial economic recession than previously predicted. 

Domestic inflation uncertainty is regarded as a primary source of downside risk. Higher domestic inflation could weaken consumer spending. 

Furthermore, an unexpected increase in inflation may necessitate additional monetary tightening.

As the Malaysian economy grows, it is expected that poverty rates and income disparity will fall further, particularly with the implementation of inclusive policies. 

However, it is worth mentioning that approximately 490,000 Malaysian homes remain exposed as a result of the Covid-19 pandemic – which emphasises the importance of well-targeted social protection programmes.

The report also added that the government’s initiative to build the ‘Pangkalan Data Utiliti Kebangsaan’ (PADU) – which is the national household socioeconomic database, is critical in identifying eligible beneficiaries and guaranteeing expanded coverage and enhanced protection for those in need. 

These measures show Malaysia’s commitment to creating economic resilience, diversity, and social well-being as it navigates the changing economic landscape in 2023.

Speaking during the media briefing for World Bank’s Malaysia Economic Monitor (Part 1), World Bank lead economist Apurva Sanghi said Malaysia can improve FDI by focusing on three factors that are remarkably consistent and remain the same across time and space – political stability, quality of infrastructure and talent.

Furthermore, explaining Malaysia’s GDP forecast for 2024 from 4.2 to 4.3, which seems lagging behind neighbouring countries that are emerging as benefiting from trade extensions, Sanghi noted that different countries are at a different stage of development – which Malaysia is nearing high-income. 

“Neighbouring countries like Indonesia just reached the upper middle income threshold this year. The more advanced the country is, the slower it grows, but it grows on a bigger base. Malaysia has a stronger and bigger base. 

“So, you would expect it to grow naturally slower than others. But, of course, there are country specific factors that come into play as well,” he said to the media on Monday.

Sanghi also highlighted the importance for Malaysia to have a proper medium term strategy for a period of three to five years in order to restore the fiscal buffer.

“Malaysia’s fiscal buffer has been shrinking due to many reasons. The question is about revenue mobilisation. We believe that it is high time Malaysia has a proper medium term revenue strategy.

“Revenues as a share of GDP have been declining – so tax revenues, federal tax revenues are below 12% of GDP. But when it comes to this medium term revenue strategy, the most important thing is to have a long term fiscal view on what the Malaysian economy needs to spend on and how much more revenue needs to be mobilised,” said Sanghi.

He added that the first step is to have a long-term fiscal picture of Malaysia’s expenditure needs by sectors; to have a quantifiable objective to meet; and to have a mix of appropriate instruments, depending on the revenue gap between present city revenues and what needs to be raised.

Concerning subsidy rationalisation and if it will increase the burden on most people, Sanghi said that it is critical to remember what these subsidies are for and who they are designed for in the first place. 

“Like most other subsidies, fuel subsidies are intended to benefit the poor. So, are these subsidies helping the poor as intended? No, since it is so blanketed that the T20 benefits disproportionately from these fuel subsidies.

“So, I believe the crucial question is, what do you do if it does not happen within? You start inventing, you start targeting, you pivot towards a secondary objective – at least towards people who are intended for. 

“That is the policy context we are in, and I must add that we are pleased to see public declarations by the government indicating that they are moving towards, or want to move towards, a targeted subsidy system,” he added.

However, he noted that the issue of subsidy rationalisation is about more than simply money – it is about the system as a whole. 

“This is a political economy and social contracting; and I believe this is where things become complicated. 

“This work will boost the possibilities of subsidy nationalisation by ensuring that we have all the nuts and bolts in place, as well as a political economy.”

The media briefing also noted that the World Bank will be launching its September 2023 World Bank Malaysia Economic Monitor (MEM) on Oct 10, 2023, which will also follow a panel discussion on part two of the report.