KUALA LUMPUR (June 12): CGS-CIMB has raised its 2023 growth forecast for Malaysia’s gross domestic product (GDP) to 4.6% year-on-year (y-o-y) from 4.4% previously following strong first quarter of 2023 (1Q2023) numbers as well as projected resilient domestic demand.

Additionally, it said tourism-related sectors and improvement in the labour market will continue help drive the economy, which grew 5.6% y-o-y in 1Q2023.

In a research note on Monday (June 12), CGS-CIMB economist Nazmi Idrus said: “We now expect private consumption growth to expand slightly higher in 2023 by 6.7% y-o-y versus 6.5% y-o-y previously, following the Malaysian government’s efforts to increase disposable income of the nation in its revised Budget 2023 announcement.”

CGS-CIMB expected growth in the first half of 2023 (1H2023) to be higher at 5.2% y-o-y versus the previous estimate of 4.4%, before going softer in 2H2023.

The research house noted that key downside risks to its forecasts are economic volatility in advanced economies, slowdown in China’s economy, and tighter global monetary policy.

Notably, CGS-CIMB has lowered its 2024 GDP forecast to 4.6% y-o-y from 4.8% y-o-y previously amid the expected global slowdown at the end of 2023.

On investment activity, Nazmi expected Malaysia’s investments to grow by 4% y-o-y in 2023 versus 6.8% y-o-y in 2022 while remaining positive on the impact of the RM97 billion development expenditure in 2023.

He added that excluding the portion towards 1Malaysia Development Bhd bond payments, RM83.7 billion would be dispersed primarily to the 5G rollout and the transport sector, specifically for civil engineering including the East Coast Rail Link, Light Rail Transit and Klang Valley Double Track.

“Following this, we project the construction sector to record stronger growth of 9.3% y-o-y in 2023 versus our previous forecast of 1.6%.

“For both services and manufacturing, we still project positive growth in these sectors in 2023, as support from domestic-oriented industries [is] still robust,” he said.

However, Nazmi said manufacturing slowed by 1.6% y-o-y versus his previous forecast of 4.7% amid a tamed momentum as Caixin China Purchasing Managers’ Index was neutral at 50.0 in March and declined to 49.5 in April due weaker global demand.

“Further, we have yet to see signs of recovery in the electrical and electronics (E&E) industry, although the pace of contraction has eased this year,” said Nazmi. The World Semiconductor Trade Statistics had projected the semiconductor market to contract by 4.1% y-o-y in 2023 against the 4.4% growth in 2022.

He noted that external demand would impact overall investment activity despite the government’s target for more quality investment and enhancing growth of micro, small and medium enterprises.

On exports, Nazmi revised CGS-CIMB's projection to a 7.8% y-o-y contraction in 2023 against a 5.8% y-o-y growth in the previous forecast.

“We believed that exports are likely to remain weak, due to the high base effects and weakening prospects for demand ahead, after the slow performance in 1Q2023.”

He expected further decline in manufacturing exports after two consecutive months of negative growth, despite the strong double-digit growth in 2022.

“Higher cost of living, lower inventory preference by firms, as well [as] consumer preference for spending on services post pandemic are some of the key restraints in propelling goods demand.

“In short, we expect nominal exports to contract y-o-y for the rest of the year.”

Nazmi has also lowered the goods account forecast to 1.6% of 2023 GDP from 2.1% previously, as goods account surplus is expected to narrow amid slowing demand from major trading partners.

The economist has also raised the consumer price index (CPI) growth forecast to 3.3% y-o-y in 2023 from 3% previously as the government had announced an electricity tariff revision for higher income households in 2H2023.

“At the time of writing, details of the measures have yet to be announced by the government, but we estimate an adjustment to electricity tariffs to increase CPI growth by circa 20-60 basis points in 2023,” he said.

He also noted that the government’s intention to continue subsidising chicken prices could ease the price pressures.

“In addition, ahead of another Eid celebration at end-June 2023, we expect another round of maximum price scheme measures that should cushion the pressure from food components.”

Nazmi also revised the research house's overnight policy rate projection to a pause at 3% by end-2023 against its previous expectation of a 25 basis point hike in 2H2023

Until exports show signs of improvement, he said Bank Negara Malaysia (BNM) may shift to being more neutral given the continued weak data over the next few months, especially on the external side despite a resilient domestic economy.

“In addition, the risk of a rise in political uncertainty amid the state elections may force BNM to adopt a wait-and-see approach.

“That said, we think that barring these risks, BNM has room to remain hawkish,” he said.

In terms of Southeast Asia, Nazmi said slowdown on the external side has been felt since 4Q2023 concurrently with moderation in global demand.

“Regional economies more attuned to the global supply chain have already seen recent April 2023 exports fall into negative territory, and this is likely to continue for a good portion of the year.”

Despite the shifting political environment in Malaysia, Indonesia and Thailand posing risk to growth, domestic sectors appeared resilient with Chinese tourists returning gradually and consumption supported by a healthy labour market, easing inflationary pressure and upward revision on minimum wage, he added.

Nazmi noted that the upcoming state elections can be construed as a referendum for or against Prime Minister Datuk Seri Anwar Ibrahim’s leadership, despite having no risk in major policy changes.

“An election result that favours the ruling political coalition may lead to more stringent reforms, such as changes to the subsidy systems (for food and fuel) and widening of the tax base to address the national debt.

“If the results do not favour the ruling political coalition, the federal government would like to tread more carefully, leading to more muted economic reforms,” he said.