KUALA LUMPUR (March 28): Malaysia’s economy (gross domestic product or GDP) is projected to slow to 3.5% in the second quarter of this year (2Q2023), down from an estimated 5.1% in 1Q2023, due to waning low base effect and as the economy returns to normalcy with the absence of stimulus measures, according to Kenanga Investment Bank Bhd.

This is also considering the impact of the global economic slowdown amid further tightening in global monetary policy to combat rising inflationary pressure, it said in an economic report on Tuesday (March 28).

Against this backdrop, the research house maintains its 2023 GDP growth forecast of 4.7%, versus the government's projection of 4.5% growth and the consensus 4%.

“Nevertheless, we believe the downside risk to growth, from the domestic side, will be limited due to the lower political risk premium and the expected increase in investments. This is also due to a clear policy direction by the unity government along with its revised Budget 2023, which saw the government continue to lean towards expansionary fiscal policy to support growth,” said the research house.

According to Kenanga, the economic growth will also be supported by robust domestic demand, amid sustained private spending due to lower unemployment rate which is expected to average at 3.5% from 3.8% in 2022, and supportive policy measures, including the continuation of subsidies and cash transfer programmes for the B40 group.

Touching on the headline of the consumer price index (CPI), Kenanga said the country’s CPI headline is expected to decrease gradually to 3% to 3.5% on average in 2Q2023 due to government’s efforts to reduce cost of living, a stronger ringgit and falling commodity prices.

“Additionally, the expectation that the government may continue to provide fuel subsidies throughout the year may continue to assist in reducing inflation. However, a potential removal of ceiling price for eggs and chicken in June may marginally increase price pressure,” it explained.

On the external front, there are still some potential risks that could push inflation higher, Kenanga said.

These include a possible increase in tourism activity, which could boost demand and push up prices for goods and services, and heightened geopolitical uncertainty, which could lead to an increase in commodity prices and further exacerbate inflationary pressures.

“Despite the risks, the overall expectation is that inflation will continue to trend lower in 2Q2023 and potentially average around 2.5% in 2023,” Kenanga added.