KUALA LUMPUR (Aug 2): Malaysia’s economic growth is expected to cool in the second half of 2023 (2H2023) to 4%-5%, reflecting a decline in exports and tepid consumer spending amid a moderate global economic environment, according to the Socio-Economic Research Centre (SERC).

The research outfit’s executive director Lee Heng Guie said the normalisation of domestic demand, which has already eroded the base effect, sticky core inflation and high cost of living, as well as policy uncertainties awaiting the outcome of the six state elections will continue to weigh on the health of the economy.

“The robust consumer spending we have seen before may not happen again. Based on our data, it has normalised due to inflation, and high cost of living. There will be growth, albeit at a slower pace. Cash stimulus has been spent, and [the] revenge spending we saw in [the] post pandemic [period] has already faded,” said Lee at a briefing on the SERC Quarterly Economic Tracker report on Wednesday (Aug 2).

However he said the stable labour market, lower unemployment rate, accommodative interest rate and stronger investment approvals that amounted to RM71.4 billion in the first quarter of this year, will continue to provide support to the growth of the economy.

Lee also stressed the need for strategic policies to be rolled out by the government, that will provide better clarity for the country’s economic participants.

“Directives such as the New Industrial Master Plan would provide a strategic direction for high quality and value-added industries to accelerate Malaysia‘s industrial growth by stimulating innovation, boosting technology adoption, tackling global concerns, and ensuring economic stability and inclusivity,” he added.

Globally, Lee foresees that China’s significant slowdown in economic growth could be a risk for trading partners like Malaysia, in which the slowdown could deprive important Chinese demand for raw materials and consumer goods.

He added that exports earned from China’s robust demand in the past could fade.

“China’s high youth unemployment data is a cause for concern, which has hit about 21% in June. The Chinese real estate sector has also been under pressure for the last one year, which has not been fully addressed,” he said, adding that over in the United States, a recession risk is very much on the cards in the next six months.

Lee said the overall picture is that monetary tightening is clearly slowing and likely to pause in the second half of year 2023. Inflation may have peaked, but upside risks could make the monetary policy tightening more challenging.

“Ultimately, central bank policy moves will be driven by the current and expected path of inflation,” he said at the briefing.

The research house expects headline inflation to range between 2.8% and 3.3% this year, easing from an estimated 3.5% last year.

It also forecasts the central bank would pause its overnight policy rate at 3% this year, taking into account the global growth concerns, moderating domestic economic growth and easing inflation.

“There is, however, renewed inflation pressure following the changes in domestic fuel subsidy policy and also the impact of a weakening ringgit.

“If such a scenario plays out, BNM will have no choice but to hike rates further if the growth continues at a steady pace,” Lee said.

The research house also expects headline inflation to average at 2.8% for this year, although core inflation is expected to stay elevated.

Amid stable labour market conditions, the research firm expects growth in private consumption to continue normalising as consumers tighten discretionary spending in response to inflation and rising cost of living.

Private consumption in 1Q2023 grew by 5.9% and is expected to increase by between 4.5% and 5.0% in 2023-2024.

“We have reasons to expect a moderate pace of households’ consumption as they exercise discretion between necessities, consumer durables and non-necessities in coping with rising cost of living.

“In addition, higher interest rates (borrowing costs) would mean higher debt service payments for higher-debt borrowers. 53.4% of total household loan accounts have floating-rate loans,” Lee said.