Can Malaysia avert a recession?

To the rescue: A worker walks near containers at North Butterworth Container Terminal in Penang. The reopening of China’s borders – Malaysia’s largest trading partner – will help to partially offset the slowdown in Malaysia’s external demand.

MALAYSIAN economy enjoys a very strong correlation with the world, being the 24th largest exporting nation.

Socio-Economic Research Centre estimates the correlation at 0.84 between 2011 and 2021, based on a scale of minus 1 to 1 whereby 1 represents the strongest economic relationship.

Simply put, if the world prospers, Malaysia will prosper as well. But, if the global economy hits a wall, Malaysia has no choice but to also face the impact.

Stepping into 2023, talks about a potential global recession has intensified, and the head of the International Monetary Fund warned that a third of the global economy will be in recession this year.

More large companies are retrenching their workers. Two of the United States’ biggest employers, Meta Platforms Inc and Amazon.com Inc, have announced that they are axing 11,000 and 18,000 jobs, respectively.

As central banks are ending their pandemic-driven cheap money policy with interest rate hikes, this has certainly taken a toll on the global economy, including Malaysia.

Kenanga Research anticipates the domestic economy to be sluggish in the first quarter of 2023 (1Q23), growing at 3.9% as compared to a projected 6.6% growth in 4Q22.

In the current year, the economy will continue to be affected by high prices, rising interest rates and the resurgence of Covid-19.

With major economies such as the United States and Europe expected to experience a recession this year, this will also cause a slowdown in external demand.

For a trade-reliant country like Malaysia, whereby its trade-to-gross domestic product (GDP) ratio for 2021 was 131%, a slowdown in external demand will drag down economic growth.

Amid talks about a global recession, many pundits are expecting the upcoming economic downturn to be a shallow one.

This means that the recession in 2023, if it happens, will not be as destructive as what the world has seen back in 2020 or 2008.

As for Malaysia, while the possibility of a quarterly gross domestic product contraction remains, it seems that the country could avert a recession this year.

Earlier in November 2022, Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus is not heading towards a recession in 2023, although she admitted that pressing headwinds will dent GDP growth this year.

Maybank Investment Bank (Maybank IB) has also said recently that the country is unlikely to fall into a recession.

However, given Malaysia’s strong reliance on the global economic performance, the country is forecast to experience a slowdown in GDP growth this year.

Under the pre-election Budget 2023, the government projected a growth of 4% to 5%.

Maybank IB anticipates a growth of 4%, down from 8% forecast for 2022.

In a note last month, CGS-CIMB Research revised its 2023 GDP growth projection lower to 4.4%, as compared to 5% previously.

The economy will also be weighed down by the threat of stubbornly high inflation, which could dampen private consumption and trigger further financial tightening on the back of Bank Negara’s overnight policy rate (OPR) hikes.

It is noteworthy that core inflation in Malaysia has been rising for 14 straight months and food inflation surged to a record-high level in November 2022.

However, despite these challenges, it is expected that domestic demand will anchor the economy amid a steady recovery in the labour market as well as further revival in the tourism-related sectors.

Continuous consumer spending and a possible revival of infrastructure projects would further buttress the economy.

In addition, the reopening of China’s borders – Malaysia’s largest trading partner – will also help to partially offset the slowdown in Malaysia’s external demand.

In fact, with the return of Chinese tourists into Malaysia, this would spur the local economy, especially the tourism business.

It is noteworthy that Chinese tourists accounted for 12% of total tourist arrivals into Malaysia in pre-pandemic 2019.

On average, Chinese tourists spend more per visitor than any other major tourist groups in Malaysia at close to RM5,000.

Amid the headwinds, the Malaysian economy is likely to hit a soft patch in the first half of 2023 (1H23).

However, the growth momentum is expected to pick up once again moving into 2H23, assuming there are no major global economic disruptions.