Bracing for lower GDP

PETALING JAYA: Persistently negative growth in Malaysia’s total trade for the past two months signals a looming economic challenge, heightening concerns the country’s third quarter (3Q23) gross domestic product (GDP) growth may fall below expectations.

Bank Islam Malaysia Bhd chief economist Firdaos Rosli pointed out that Malaysia’s total trade has been on a decline since mid-3Q22, and the trend continued to August 2023.

“We are seeing the impact on Malaysia’s GDP growth in 2Q23, where net exports to GDP slumped about half of our long-term net exports share to GDP.

“Considering that Malaysia’s total trade growth has still been negative over the past two months, it is highly likely that 3Q23 GDP growth will come in lower than expected,” he said in a reply to StarBiz.

He added that the industrial production index (IPI) in July came in low at 0.72% year-on-year (y-o-y), dragged by the fall in manufacturing IPI at negative 0.19%, while its manufacturing purchasing managers index continues to trend below the 50-point mark since September 2022.

Firdaos attributed this trends to weaker external demand continuing to exert pressure on growth.

Addressing the decline in global trade volumes, SPI Asset Management managing director Stephen Innes suggested a significant portion of this downturn can be attributed to the aftermath of the heightened demand for goods in 2021, resulting in what’s termed as demand payback.

Moreover, these changes may indicate a structural shift in consumption patterns, favouring services over goods.

“However, services in Malaysia comprise over 50 % of GDP, and while not at the 80 % level of the United Kingdom, services still occupy a good chunk of Malaysia’s economy, so not all doom and gloom.

“Hence, idiosyncratic domestic factors could help,” he said.

Innes believed Malaysia, in its quest to mitigate the potential impact of reduced world trade on its economy, has a significant opportunity to position itself at the cutting edge of greener technology.

The country’s efforts to enhance collaboration in green technologies with Japan and South Korea, aimed at addressing climate change, should be intensified to attract foreign direct investment, he said.

“There will be no decarbonisation and no net-zero achievement without the involvement of Asia, so Malaysia could be a leader in the movement here, given its local expertise in the oil and gas field,” he added.

Commenting on the key factors or underlying causes contributing to the notable decline in global trade volumes, Firdaos said the outbound shipments to major trading partners, namely the United States, the European Union (EU) and China are the key growth headwinds to Malaysia.

“While the United States and the EU continue to battle raging inflation over the past 18 months or so, it is still far from over amid cost-push factors.

“The rising borrowing cost is not helping either.

“China, on the other hand, is battling the opposite side of inflationary pressures, which in turn puts a small and open country like Malaysia in a precarious situation,” he said.

Firdaos remained optimistic about the future of world trade, expressing a belief that while it may not reduce, the pace of growth could slow down due to the reconfiguration of global value chains.

He suggested that in light of this, there should be a concerted effort to enhance the utilisation of existing free trade links.

Simultaneously, there is a call to strategise and strengthen connections with major global importers like the United States and the EU.

Furthermore, Firdaos emphasised the need for bilateral free trade agreements with China and South Korea, in addition to the existing links through Asean.

“From the public finance perspective, I think austerity is not the answer to slowing growth.

“For a developing economy, slow growth can cause more harm than good. Thinning corporate margins would eventually lead to slow wage growth,” he added.

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