KUALA LUMPUR (June 19): Malaysia’s gross domestic product (GDP) growth is expected to slow to 4.1% year-on-year (y-o-y) from the second quarter of this year to the fourth quarter as external economic headwinds intensify, according to OCBC Bank chief economist Selena Ling, and her colleague and fellow economist Lavanya Venkateswaran.

The main drag on growth will come from exports — which reflect not only weaker external demand but also fading commodity price tailwinds and a prolonged downturn in the global semiconductor cycle.

With the weakening external demand, they expect Malaysia’s domestic demand to also moderate in the second half of 2023 and 2024. For the whole of 2023, the duo is expecting GDP growth of around 4.4% y-o-y.

“Importantly, the expected boost from China’s reopening at the start of 2023 [was] disappoint[ing] and this may persist for the rest of the year. Our forecast is for China’s 2024 growth to slow to 5% y-o-y, from 5.7% y-o-y in 2023. Hence, we lower our 2024 GDP growth forecast for Malaysia to 4.5% y-o-y, from 4.7% y-o-y previously,” the duo said in a press statement.

“Nominal manufacturing and services sector wage growth remained solid in 2022 and 1Q2023, supporting private consumption but with manufacturing output slowing, wage growth will likely moderate and in turn weigh on private consumption. Furthermore, given the sharp depreciation in the currency (RM depreciated 4.6% versus the US dollar from January through to June 12, 2023) and fading commodity tailwinds, we expect investor sentiment to remain cautious into 2H2023,” they wrote.

Meanwhile, they believe growth support from the public sector will be limited by the government’s fiscal consolidation agenda, under which the duo observed it is on track to achieve the fiscal deficit target of 5% of GDP in 2023, from 5.6% in 2022 — supported by higher revenue collection, and lower subsidy and social assistance spending.

“Moreover, the government has indicated its intention to follow through with the implementation of a targeted subsidy mechanism on electricity and retail fuel, which will create fiscal space to focus on infrastructure spending and other development priorities. The implementation of targeted electricity subsidies may be as early as this year, followed by targeted fuel subsidies in 2024,” they noted.

This will add to inflationary pressures, and the two economists’ baseline for headline inflation eased to 2.9% y-o-y in 2023 from 3.4% y-o-y in 2022, while that of core inflation remained unchanged at 3% this year — in line with Bank Negara Malaysia’s 2.7% to 3.8% forecast range for headline and core inflation this year.

“Our baseline forecast is for BNM to remain on hold for the rest of 2023 and into 2024. However, if the Federal Reserve Board is more hawkish than our baseline forecast, then there is a chance of an incremental 25bp hike by BNM later this year,” they added.

They noted that a 25bp rate hike from the Federal Reserve by July is almost fully priced-in by the markets, but said a reversal is still tipped by markets for 4Q2023. “Our house view is for a similar end-year policy rate, but we lean towards the Fed keeping its policy rate unchanged for the rest of this year,” they added.

As for the EU, which entered a technical recession in the first quarter of this year, OCBC expects the European Central Bank (ECB) to remain hawkish in the near-term. The ECB lifted interest rates by another quarter point at its June 15 meeting, with its president Christine Lagarde describing a further hike in July as “very likely”.  

Brent oil, meanwhile, is expected to average at US$90/per barrel in 2023, from the current US$74/per barrel — implying further upside for the rest of the year. “We expect specifically for oil prices to rebound in 2H2023, as accumulated oil stocks begin to wear down and the market shifts to a physical deficit situation,” said Ling and Lavanya.

But a sustained upcycle in commodity prices is unlikely at this point, they said, noting that palm oil prices have more than halved from their record high in 2022.

Though palm oil prices remain above their pre-pandemic average, the drop reflects improving global edible oil supplies and reducing palm oil premiums over rival soft oil like soy and rapeseed oil. Declining demand from major importer India amid higher supplies from main palm oil producers Indonesia and Malaysia have also added to some bearish sentiment for the commodity, they added.

“For the rest of this year, we expect the supply of palm oil to normalise as labour shortages in Malaysia’s CPO sector ease. That said, El Nino-associated risks warrant close attention,” they noted.

The ringgit, which at the time of writing is trading at 4.63 against the US dollar, is expected to remain under pressure in the near term, said Ling and Lavanya, given the broad softness in oil prices, the resurgence in US dollar strength, much higher US Treasury yields and the renminbi's depreciation amid disappointing China growth data — factors that led to the underperformance of the ringgit relative to its peers that are still at play.

“Domestic factors include a shrinking current account surplus and lesser impetus for BNM to tighten monetary policy after headline CPI slipped... Our forecast for USDMYR is 4.5 by end-2023 and 4.4 by end-2024,” they added.

The downside surprise this year was China, and both expect that the Chinese economy will continue to grapple with structural constraints for the rest of 2023 and into 2024 — statistical base effects aside, said Ling and Lavanya.

These constraints were evident prior to the pandemic, for example in the property sector, but were exacerbated by the stringent pandemic lockdowns, shifts in the supply chain and a more subdued consumption recovery, following the reopening of the country's economy in January.

The lack of a growth fillip from China is already being reflected on the Asean-5 countries, particularly weak goods export growth to China and the slow recovery in Chinese tourism, they said.

But tourist arrivals from China are climbing and the economists expect the upcoming Golden Week holiday in China in October to support greater international travel into Asean.

Goods export growth from Asean to China, which has shown limited signs of recovery, suggests that Chinese domestic demand remains soft, said Ling and Lavanya. “Given the differentiated product mix of exports from Asean into China, we believe a broad-based economic recovery in China is critical for a convincing export recovery,” they said.