Weakening external demand

Kenanga Research projected 2023 GDP growth to be within the band of 3.5%-4%. — Reuters

PETALING JAYA: Recent weak economic data have raised concern that Malaysia’s gross domestic product (GDP) growth this year may fall short of the government’s expectations.

As it is, there are several analysts projecting 2023 GDP growth to come in lower than the official forecast of 4% to 5% for the year.

They cited weakening external demand and softer domestic spending as well as a high-base effect, whereby GDP grew at an impressive rate of 8.7% in 2022, as the main reasons for their projections coming in below the government’s forecast for 2023.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, for one, told StarBiz that his group’s 2023 GDP forecast at present stood at 3.5%.

“The main premise of this is the weakening external demand,” he explained.

Mohd Afzanizam noted business activities in the country had slowed as a result of weakening external demand, and sentiment was also relatively downbeat, as indicated by the manufacturing Purchasing Managers’ Index (PMI), which had been hovering below the 50-point mark, separating monthly expansion and contraction, throughout 2023.

He pointed out that interest rate hikes since last year were expected to have a material impact on the world economy in the second half of 2023, as there tended to be a lagging effect from past increases in the global benchmark interest rates.

“Domestically, consumers have become more guarded as the rise in the cost of living has resulted in cautious spending among households,” Mohd Afzanizam said, adding that the high-base factor recorded in the second half of 2022 could also impact Malaysia’s 2023 GDP number.

Even more pessimistic was a forecast by the Institute of Chartered Accountants in England and Wales (ICAEW), which expected Malaysia’s GDP growth to reach only 3% in 2023.

“This projection, while is below the consensus of 4% and the central bank’s forecast of 4%-5%, is based on a realistic assessment of the economic landscape,” the professional accountancy body said in a recent statement.

It pointed out that achieving the higher estimates would necessitate exceptionally strong economic growth in the second half of 2023, which could be a challenge.

“While Malaysia’s growth prospects are present, sustaining high growth rates might pose some challenges. Furthermore, the background for (domestic) spending growth faces some headwinds, including high personal debt burdens and depleted savings among households,” it said.

According to ICAEW, although Malaysia’s tourism sector is showing encouraging signs of recovery and expansion, the export sector continued to face headwinds.

“Falling export earnings will pose difficulties for businesses’ hiring and spending plans, compounded by a tough export environment. Economic data from China, Malaysia’s largest export partner, has deteriorated in recent months, tempering hopes for substantial economic improvements elsewhere and demand from the rest of the world is expected to falter as growth is curbed by tight monetary policy,” it explained.

“Investment prospects are also expected to remain cautious. While construction may rebound from the pandemic slump and government infrastructure spending is being increased, higher interest rates and a drop in exports will weigh on the expansion plans of the externally-focused industrial sector,” it added.

Also expecting 2023 GDP growth to fall short of the official range, Hong Leong Investment Bank (HLIB) Research said this would reflect the high base effect of last year, weak external demand and subpar recovery in China despite its reopening.

As such, the brokerage maintained its 2023 GDP growth forecast at 3.8% for Malaysia. For 2024, its preliminary GDP growth forecast at 4.8%.

In an earlier note, HLIB Research said Malaysia’s trade performance had remained on a downward trend in recent months, dampened by high base effects, elevated global interest rates and weak external demand.

“Trade activity has also been affected by the Chinese economy, which has struggled to gain momentum in recent months,” it added.

Malaysia registered a wider contraction of exports last month at 18.6%, as compared to 13% in July, due mainly to lower shipments of electrical and electronic products, palm oil and petroleum products.

Imports also recorded a steeper decline of 21.2% last month, as compared to 16.1% in the preceding month. The trade surplus eased slightly to RM17.3bil in August from RM17.4bil in July.

Meanwhile, Kenanga Research projected 2023 GDP growth to be within the band of 3.5%-4%, adding that the country’s economy was expected to be supported by resilient domestic demand, spurred mainly by fiscal spending.

“Year-to-date, exports fell by 7.6% compared to the same period recorded last year. This is mainly attributed to lower commodity prices, weaker global trade activity, and the effect of the high base recorded last year. The slowdown period is expected to continue towards the end of the year, albeit easing slightly, as cumulative rate hikes among advanced and emerging economies increasingly affect aggregate demand,” the brokerage explained.

Maybank Investment Bank (MaybankIB) Research recently revised its 2023 GDP growth forecast back to its original 4% from 4.5%, which was raised in May amid China re-opening “euphoria” that had now “soured”.

It expected the country’s GDP for the second half of 2023 to be supported by on-going tourism recovery and the positive investment growth momentum as well as the expected increase in government deficit spending.

Other financial institutions that expected Malaysia’s 2023 GDP growth to meet the lower band of the official forecast despite the ongoing challenges included AmBank Research, OCBC Bank and CGS-CIMB, which pegged their forecasts at 4%, while TA Research expected the number to reach 4.2%.

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