This article first appeared in The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024

MALAYSIA’s exports are likely to grow at a modest pace in 2025 following a rebound in April this year, as global growth remains stable. Economists say potential wild cards that may knock everything off course include the outcome of the US presidential election in November, China’s tackling of its economic slump and the widening of the conflict in the Middle East.

Total exports grew for a fifth straight month in August, rising 12.1% year on year (y-o-y) to RM129.16 billion, above market expectations of 11.8%, according to Department of Statistics Malaysia (DoSM) data last Thursday. The growth was primarily supported by an increase in electrical and electronics (E&E) products and a sharp rise in shipments to the US and other major trading partners. Exports grew 12.3% y-o-y in July.

The Industrial Production Index (IPI), which measures output from factories, mines and power plants, expanded by 5.3% in July, also beating market expectations of 4.2% and May’s 2.4% y-o-y gain. Even if output from the manufacturing sector was partly due to the low base effect since last year, which saw weaker exports, economists are optimistic about the sector’s upward growth in the coming months.

Sunway University Business School professor of economics Dr Yeah Kim Leng says Malaysia’s industrial production and merchandise exports are closely linked given that export-oriented industries account for nearly 70% of the country’s total output.

“Not surprisingly, the IPI and exports have high correlation coefficients of 0.9 and 0.7 in value and growth terms respectively, whereby +1 indicates a perfect correlation. The recovery in gross exports from an 8% contraction in 2023 to a 3.9% rise in the first half of 2024 suggests that Malaysia’s export sector and likewise industrial production are undergoing moderate and healthy expansion,” Yeah, who is also deputy president of the Malaysian Economic Association, tells The Edge.

According to the International Monetary Fund’s July World Economic Outlook forecast, the global economy is projected to grow 3.2% in 2024 — 0.1 percentage point below the 3.3% growth achieved in 2023. Yeah believes that global economic growth is expected to fall back to 3.3% in 2025, suggesting moderate expansion of Malaysia’s industrial output in that year.

This puts Malaysia’s projected industrial output growth at 4.8% and firmer merchandise export growth at 9.7%, up from the estimated 4% and 7.8% respectively for 2024, says Yeah.

The majority of economists The Edge spoke to last week share this view, as the cautiously optimistic projections are subject to downside risks arising from global uncertainties such as an escalation in geopolitical conflicts, disruptions to global capital flows and financial markets caused by policy divergence, fiscal and trade imbalances, and protectionism in major economies.

Regionally, China’s exports were up 8.7% in August from 7% in July, while Taiwan’s were up 16.8% from 3.1% during the same period, indicating a positive correlation with a clear upturn in the technology and E&E business cycle.

“The theme of investing in technology with wider benefits across the entire supply chain remains intact. China’s recovering exports are also related to additional stimulus programmes in capital investments and currency depreciation. Therefore, Malaysia’s exports stand to benefit from its intersection as China’s trade partner and the positive cycle we have seen in key commodity and technology exports,” says MARC Ratings Bhd chief economist Dr Ray Choy.

Niaz Asadullah, former professor of economics at Monash University Malaysia and Southeast Asia Lead of the Global Labor Organization, sees the rise in China and Taiwan’s exports as a reflection of growing external demand, particularly in Asia, which is a key market for Malaysian goods.

"Going by this favourable trend in regional trade, Malaysia’s exports, especially in E&E and machinery, could also follow suit and enjoy an upward trajectory," says Niaz, who is also an associate fellow of the Social Wellbeing Research Centre of Universiti Malaya.

It is noteworthy that the US central bank last Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual 50 basis-point reduction to the 4.75% to 5% level, which US Federal Reserve (Fed) chair Jerome Powell said was meant to show policymakers’ commitment to sustaining a low unemployment rate now that inflation has eased.

As to what bearing this could have on Malaysian and regional exports, Choy says: “Despite the uncertainties worrying the financial markets as to the when and size of the impending interest rate cuts, such nuances will unlikely detract from the general trend of easier financial conditions in the future.”

“The present cycle of monetary policy easing and the high number of elections globally in 2024, which encourage easier fiscal policies by governments, [have been] boosting global economic growth,” he adds.

In a Sept 19 note, UOB senior economist Julia Goh and economist Loke Siew Ting say the “good strong start” to the Fed’s rate cutting cycle could lead to a soft landing in the US economy and support a further recovery in the external trade sector amid a continuation of favourable base effects.

“Next to watch is the announcement on investment incentives in Forest City’s special financial zone on Sept 20 and the budget measures for 2025 on Oct 18,” they add.

Undergirding the global demand for Malaysia’s export prospects are positive developments supporting the country’s growth momentum, Yeah notes.

He believes that apart from continuing infrastructure and construction activities, the increase in foreign investment in the electronics and related industries, data centres, renewable energies and sustainable development goal-related activities are raising the country’s output capacity, leading to higher potential growth.

Another positive development for Malaysian exports has been the rising trend in the share of services to total exports to 17% in the first half of this year from 7% in 2021, to 10% in 2022 and 15% in 2023.

Traditionally, tourism-related businesses, logistics, medical and education, information technology and professional business services have been the sectors underpinning the growth of the services industry in the country. And now, the advent of e-commerce, data centres, and cloud and digital technology services, including artificial intelligence, has pushed Malaysia’s services exports upwards by 58.3% in 2022 and by 33% in constant prices as captured in the national accounts statistics published by the DoSM.

In the first half of 2024, the sector’s quarterly growth averaged 29.2%, raising its share of total exports of goods and services to 17.4%, up from 14.7% in 2023.

“With [that], Malaysia’s services exports are expected to continue their robust growth trajectory, thereby reinforcing the country’s growth sources and export diversification,” Yeah contextualises.

Meanwhile, MARC’s Choy believes that strong performance in the palm oil sector in 1H2024 is helping to offset the slow recovery in petroleum product exports.

“Apart from traditional manufacturing, the services sector will also benefit from the trend of ‘friendshoring’, where multinational companies make relocation decisions to Malaysia due to cost and infrastructure advantages. More specifically, data centres, digitalisation and renewable energy are vast opportunities, some of which Malaysia has already captured, although competition among regional economies remains intense,” says Choy, who believes that the strong growth momentum in private investment is expected to further materialise in capacity expansion, including the service sectors and thereby reinforcing exports.

Niaz cautions that although Malaysia has a diversified export basket, the country is not immune to geopolitical shocks as well as a potential slowdown in the US and Chinese economies, which together add to the global economic uncertainties.

“Their combined effects causing a potential slowdown in export orders poses significant risks to Malaysia’s trade outlook. Specific near-term challenges include the US monetary policy and the upcoming national election, which may impact trade policies and demand. Uncertain election outcomes mean we can expect a rise in speculative behaviour.

“Similarly, China’s gradual recovery and lower consumer spending could weaken demand for Malaysian goods. Long-term challenges involve maintaining competitiveness in key sectors like E&E and addressing rising concerns about environmental, social and governance compliance and regulations,” explains Niaz.

To this, Yeah adds that vulnerabilities such as high fiscal deficits and debt levels, disorderly currency adjustments, energy and food price inflation, current account imbalances and financial market corrections could shake investor and consumer confidence in the US, China and Europe.

There is no going around flare-ups in geopolitical conflicts and trade tensions that remain a recurring challenge to Malaysia’s export sector, Yeah says.

“The continuing global uncertainties, especially policy shocks, will increase investors and business risk aversion as well as destabilise trade, capital flows and financial markets, leading to lower world trade and investment activities. To safeguard against global threats, especially protectionist policies, Malaysia can step up trade and investment facilitation through bilateral and regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP),” he says. RCEP is the world’s largest free trade agreement covering 15 countries, including Malaysia. 

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