Can private consumption hold the fort in 2023?

PRIVATE consumption, which contributed 58.2% to gross domestic product (GDP) in 2022, is expected to moderate this year but will remain resilient despite cost of living pressures and external challenges.

Personal spending will be aided by, among other factors, the recovery in the labour market, gradual return of Chinese tourists and government support measures.

In the long term, it will be boosted by higher investments.

In terms of credit card spending, the financing of credit cards has been registering double-digit growth since June 2022 (December 2022: 14.9% versus November 2022: 13.3%).

Credit card transactions have been rising since the first quarter of 2021, with 68.7 million transactions in December, 2022, while the value of Internet banking had reached RM104.8bil in December, 2022.Against elevated oil prices, the government is expected to tighten its grip on price controls and maintain the current subsidy structure to keep inflation at about 3% in 2023, said Bank Islam Malaysia chief economist Firdaos Rosli.

Due to external growth headwinds, the government is not expected to proceed with targeting subsidies anytime soon, as that would raise the inflation rate.

A stable unemployment rate, expected at 3.5% to 3.7% in 2023 (3.6% in 2022), improved wage levels and anticipated boost from Chinese tourist arrivals will partially underpin retail spending.

Further supporting private consumption are, among other things, the continuation of cash assistance for targeted households and individuals, special payment and salary increments for civil servants as well as a 2% reduction in the personal income tax rate for chargeable income exceeding RM35,000 to RM100,000.

Private consumption, which expanded by 11.3% in 2022 (1.9% in 2021), is expected to normalise to a more sustainable pace of 6.1% in 2023, said Socio Economic Research Center executive director Lee Heng Guie.

Moderating factors include the waning effects of pent-up demand and Employees Provident Fund withdrawals, as well as the lag impact of higher interest rates.

There is still respectable growth for private consumption of 5.7% this year (7.1% average 2010 to 2019), the unemployment rate is expected to return to the long-term level of 3.3% by end of 2023 (3.6% end-2022), said RAM Rating Services head, economic research and senior economist, Woon Khai Jhek.

Providing some buffer for private consumption is the expansionary Budget 2023 and a supportive labour market; vacancies are still high, with resilience in the informal sectors providing more choices for job seekers, said United Overseas Bank senior economist Julia Goh.

However, the return of Chinese tourists may be gradual in the first half of 2023, owing to a more challenging economic climate and capacity constraints.

Private consumption looked weak in the fourth quarter of 2022; GDP growth contracted from 1.9% in the third quarter of 2022 to minus 2.6% in the fourth quarter of 2022.

While tourism and the labour market should support private consumption, Bank Negara is expected to adopt a wait-and-see approach with regard to interest rate hikes amidst an increasingly weaker domestic environment, said CGS-CIMB Research in a note.

Assuming that the major economies are able to avoid a recession this year, export-oriented industries should still help to support the economy.

Thus, the labour market should stay at full employment while resilience in the banking sector would allow continued access to credit.

(Full employment does not mean zero unemployment, but a situation where those who are able and willing to work can find a job).

All this will underpin consumer spending this year, said Bank Muamalat head for economics, market analysis and social finance, Afzanizam Abdul Rashid.

As an indication of resilience, strong correlation is noted between private consumption/credit card outstanding (74.3%), and private consumption/total employment year-on-year (70.9%).

Logical way

Improving investments is the logical way for the government to “turbo boost” private consumption in a more concerted and long-term manner.

Historically, there is a high tendency for household consumption to move along with investments: the relationship was quite low in the decade following the 1997 Asian Financial Crisis but had increased in the past decade.

As the ringgit is still under-valued in real effective exchange rate (REER) terms, by around 18% to 19%, it makes sense to improve the enabling environment so that investments can thrive in Malaysia.

REER is the weighted average of a currency against an index or basket of other currencies.

The key challenge is to make Malaysia a favourable investment destination for foreign investors, especially by tapping on its comparative advantage.

Meanwhile, offering more cash handouts or improving wages in the immediate term is not advisable as it is highly inflationary; the government could end up accumulating even more debt to finance this one-off policy.

Discipline in financial planning is required, where financial literacy should be inculcated especially among youths.

In relation to changing consumer tastes, sustainable consumption of products and services that minimises the impact on the environment is becoming important, but will challenge producers to stay vigilant on the sustainability of their offerings.

Against these challenges in increasing investments, levels of financial literacy and sustainability, weakness in private consumption is not expected to be prolonged.

Past experience and historical trends indicate that Malaysian consumers are relatively resilient; once some of the headwinds pass this year, we should expect consumption activity to pick up accordingly.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.

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