This article first appeared in The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

MALAYSIA’s gross domestic product (GDP) growth for 2023 is likely to have undershot the Ministry of Finance’s official forecast of 4%, based on the dismal advance estimate for the fourth quarter (4Q2023) that was announced a week ago.

The advance 4Q2023 GDP estimate — based on data for October and November — came in at 3.4% year on year (y-o-y), below the street’s expectation of 4.1%.

This implies that GDP for 2023 is likely to have only expanded by 3.8%, which would be the lowest in a decade — should the pandemic years of 2020 and 2021 be excluded from the equation.

The actual 4Q2023 numbers will be released on Feb 16.

The gloomier numbers aside, economists are holding out hope for better economic growth in 2024, with the consensus pegging GDP growth at 4.5% this year — sitting squarely between the official target of 4% to 5%. However, the forecast range is wide. According to data on Bloomberg, out of 33 economists surveyed, the lowest GDP growth target sits at 3.2% and the highest at 5%.

While economists say the external environment continues to be fraught with risks this year, they see continued strength in domestic demand and a recovery in exports that could help give the economy a boost to outperform last year.

In 2023, exports declined by 8% y-o-y while imports fell 6.4% y-o-y, dragging the trade surplus down by 16.4% to RM214.1 billion. A large part of the weakness stemmed from the global semiconductor downcycle, which affected electrical and electronic (E&E) exports.

Nevertheless, the sector is projected to turn around this year, implying a recovery could be ahead for the sector and exports.

“We think that the global semiconductor cycle went through quite a tough period of time when there was a lot of destocking [in 2023] and people were worried about the US and China decoupling. The structural factors are still there, but at least in terms of the cycle turnaround, we think that it has probably bottomed,” says OCBC chief economist Selena Ling.

Ling points out that some of the data such as the Purchasing Managers’ Index show tentative signs that the semiconductor sector might have hit bottom. “So, we’re hopeful that in the next six to 12 months, we should see some stabilisation and an improvement in the global semiconductor cycle.”

Apart from expectation of a gradual recovery in external trade, infrastructure projects planned for the year are also anticipated to help stimulate economic activity.

“The government has budgeted RM90 billion, or 4.6% of GDP, for gross development expenditure this year. The allocation will fund about 2,000 new projects with an estimated initial cash outlay of RM8 billion,” UOB Global Economics and Markets Research said in a Jan 19 report, adding that measures under Budget 2024 will provide impetus to economic activity.

Furthermore, UOB highlighted that the year started off on a good footing for the country with Malaysia signing a memorandum of understanding with Singapore for the Johor-Singapore Special Economic Zone. The agreement to finalise its establishment is expected to be signed by 4Q2024.

There is also the potential revival of the Malaysia-Singapore high-speed rail, which is currently being mulled over by the government.

“If the cabinet approves, the second phase will be the request for proposal (RFP) stage … the key considerations [include] the project cost and [that] the HSR would be largely privately financed,” said the report.

Meanwhile, economists point out that the labour market has been improving, with the unemployment rate for November 2023 back to the pre-pandemic level of 3.3% from 3.4% in October.

On the tourism front, a continued recovery in the sector is also expected to boost economic activities.

“It’s quite clear, tourism is coming back. Chinese visitors are coming back as well. So, like it or not, the fact that the ringgit is weak makes it attractive for overseas visitors to come to Malaysia,” says Ling.

That said, the slowdown seen in China could be a hindrance to Malaysia’s growth, given that the country is Malaysia’s biggest trading partner while China tourists used to be the biggest spenders prior to the pandemic.

Nevertheless, Ling believes that China’s “slowdown story” is likely to be more nuanced. “Just because headline growth is slow or subdued, it doesn’t mean that there are no opportunities at the sectoral or industry level,” she says, explaining that even China companies are now adopting a plus-one strategy and looking to Asean as a destination for diversification.

“So, actually, that’s kind of like a little bit of that silver lining, right? Because of geopolitics and a slowdown in China, Chinese companies are expanding their wings more into this part of the world,” she adds.

CGS-CIMB Research said in its Jan 19 report that domestic consumption will continue to anchor the country’s economic growth despite the downside risk to consumption from the rollout of new taxes and subsidy adjustments as they will be done gradually. It added that the planned monthly cash handouts could adequately offset the new taxes.

The subsidy reform with the biggest impact on consumers would be the removal of the blanket subsidy for RON95 petrol that is expected to take place in the second half of the year.

The widely consumed petrol has a significant weight in the Consumer Price Index basket and historically, when the price of RON95 increased, it had led to a one-off spike in inflation, says UOB.

However, economists say the actual impact of it is hard to estimate at this point as the timing or method of implementation has not been revealed.

“Changes to domestic subsidies, in addition to volatile global commodity prices, are key upside risks to watch for inflation in 2024. This, alongside the state of the economy, labour market conditions and wage growth will determine consumer spending behaviour throughout the year while higher cash aid, civil servant compensations and the rollout of a progressive wage policy are compensating factors that would determine the extent of demand-side price pressures,” added UOB in its report.

The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says households and businesses will have to bear some adjustment from the subsidy rationalisation and new taxes that have been introduced.

“The government needs to double down on its efforts to ensure effective implementation of policies and initiatives,” he stresses.

On the external front, a large part of the potential growth will hinge on the US Federal Reserve going along with its interest rate cutting activity this year, which is likely to be followed by rate cuts by other major central banks. The cuts, taken as a whole, should result in an economic soft-landing scenario and lower interest rates in the second half of 2024.

A soft-landing scenario is where there is a cyclical slowdown in economic growth that avoids a recession.

Currently, the expectation is for the Fed to continue to leave its federal funds rate unchanged at 5.25% to 5.50% until mid-2024, before paring rates. The Federal Open Market Committee will meet on Jan 31 for its first meeting of the year.

OCBC’s Ling has forecast that a total of 100 basis points would be slashed this year — a figure she considers to be conservative. Meanwhile, UOB said in a Jan 26 report that it has priced in rate cuts of 75 basis points.

Last week, Bank Negara Malaysia kept the overnight policy rate unchanged at 3%. In its monetary policy statement, it said that it sees economic growth improving in 2024, supported by the recovery in exports and resilient domestic expenditure.

However, it highlighted that the growth outlook remains subject to downside risks stemming from weaker-than-expected external demand and larger declines in commodity production. 

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