World Bank cuts Malaysia’s GDP forecast to 3.9%

KUALA LUMPUR: The World Bank has lowered its forecast for Malaysia’s gross domestic product (GDP) growth and is now expecting a moderate 3.9% expansion in 2023, down from the previous estimate of 4.3% in April 2023.

World Bank lead economist for Malaysia Apurva Sanghi attributed the downward projection to the base effects of high growth last year and weak external demand, reflected in the exports numbers for the first two quarters.

The outlook for 2024, however, remains positive with a forecast growth rate of 4.3%, attributed to the recovery in tourism, improved global economic conditions and the impact of base effects, he noted.

“Globally, we are still in a low growth, low investment, low cooperation equilibrium. And that affects not just Malaysia but practically every other country,” Apurva told the media during the bank’s presentation of Part 1 of the Malaysia Economic Monitor yesterday.

He said the economic recovery in Malaysia post-pandemic has been robust.

Furthermore, the output in every sector is above pre-pandemic levels, except for the real estate and construction sectors, due to their sensitivity to rising interest rates, Apurva added.

However, despite the recovery, he said the absolute poverty rate in Malaysia stands at 6.2% currently, higher than the pre-pandemic rate of 5.6%.

“This translates to almost half a million households continuing to remain below the country’s poverty line,” he added.

Highlighting its reliance on major trading partners, Apurva estimated that a one percentage point (ppt) decline in United States growth could potentially lead to a 0.82% ppt reduction in Malaysia’s growth.

“Similarly, a one ppt fall in China’s growth could reduce Malaysia’s growth by 0.45% ppt,” he said.

Apart from external factors, Apurva also highlighted domestic elements that could impede the country’s economic growth.

He emphasised the vulnerability to extreme weather events, particularly those affecting agricultural regions.

“Keep in mind that most rice production in Malaysia is concentrated in the northern region. So, extreme weather events can have a disproportionate impact on agriculture, raising concerns about food security,” he said.

Echoing Bank Negara’s concerns, Apurva highlighted plant maintenance in the mining sector as a security factor that impacted second-quarter growth, with consequential effects on the overall economic performance for the year.

He also noted the dampening effects on spending growth from monetary policy normalisation, particularly in interest rate-sensitive sectors, which has been a factor weighing down the economy.

“One important statistic to keep in mind is that Malaysia has the second-highest household debt in the region, after Thailand,” he said, adding that the immediate consequences of increasing policy rates are anticipated to significantly impact the situation.

In a broader context, the World Bank calls for comprehensive services policy reform in East Asia and Pacific to boost productivity across all sectors, which could reshape economic landscapes.

World Bank East Asia and Pacific chief economist Aaditya Mattoo said services reform and digitalisation can generate a virtuous cycle of increasing economic opportunity and enhanced human capacity, powering development in the region.

“A region that has thrived through manufacturing can continue to do so, and even more effectively, by paying increased attention to services policies and developments in services,” he told the media virtually during World Bank’s East Asia and Pacific October 2023 economic update.

The World Bank has revised down its growth projections for developing economies in East Asia and the Pacific, attributing the adjustment to a sluggish Chinese economy and global demand, compounded by persistent high interest rates and subdued trade conditions.