PETALING JAYA: Despite downside risks, private consumption is expected to gain momentum this year – although its growth is anticipated to be lower than the pre-pandemic period.
Economists are pencilling in private consumption to grow at between 4.6% and 6.1% for 2024, compared with Bank Negara’s estimation of 5.7% this year. Last year, private consumption growth was at 4.7%.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek told StarBiz he anticipates domestic demand to continue being a significant driver of the country’s gross domestic product growth in 2024, besides the upliftment from the rebound in export demand.
He said domestic demand is expected to be largely contributed by private consumption growth which he projects to accelerate to 5.3% in 2024 from 4.7% last year.
He said this would largely be supported by a robust job market and supportive financial conditions.
Furthermore, Woon said private consumption growth last year was weighed down by a high base effect from 2022, elevated price pressures and the lapse of large policy support, such as Covid-19 related financial assistance and Employees Provident Fund withdrawal schemes.
As these pressures dissipate, private consumption growth should also trend higher this year, he said. To some extent, further recovery in the tourism sector also contributes upside to domestic consumption and services activities, Woon noted.
“With that said, private consumption is still expected to underperform the pre-pandemic average growth of 6.9% between 2015 and 2019.
“One of the reasons for this is that although the inflation rate has decreased, prices remain high, which will continue to put pressure on the cost of living.
“With the planned fuel subsidy retargeting, this will eat into the aggregate purchasing power and dampen consumption momentum as well.
“However, this may be somewhat mitigated by the continued subsidies and financial assistance to lower-income households,” Woon added.
RAM Rating Services Bhd senior economist and head of economic research Woon Khai Jhek
He said downside risk remains from an overly aggressive rationalisation of subsidies and revision in tariffs, as this could push up inflation and place a bigger than expected dampener on spending sentiment.
On the flipside, Woon said there is potential for an uplift or boost to consumption spending if targeted assistance to lower income households is more supportive than expected.
Given the higher marginal propensity to consume among lower-income groups, the additional assistance extended to counter the effects of the rationalisation of subsidies would help buoy consumption momentum, Woon said.
Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid expects private consumption to grow below its trend level. For example, he said between 2010 and 2023, the average private consumption growth was 6.8% (excluding 2020).
He is projecting consumer spending to hover at 6.1% for this year. Generally, Mohd Afzanizam said consumers would continue to spend as the labour market is already in full employment and have income generating for them to make purchases.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
“However, consumption function is not merely influenced by income. There are other factors that affect how people would spend and this may include their perception towards the state of the economy.
“Certainly, when prices remain at elevated levels, consumers would be more cautious as they might want to prioritise their spending plans.
“This will have an impact on private consumption growth, which we think would grow below its trend level,” Afzanizam said.
However, OCBC Bank senior Asean economist Lavanya Venkateswaran said she expects private consumption spending growth to slow modestly to 4% year-on-year (y-o-y) in 2024, versus 4.7% last year.
This is as wage growth normalises and inflation persists, driven by the government’s changes in policies including raising certain taxes, higher electricity and water tariffs.
Lavanya said the bank has not considered the impact of potential changes from government subsidy rationalisation.
OCBC Bank senior Asean economist Lavanya Venkateswaran
“Private consumption is not likely to be the main driver of growth this year and with structural reforms in the pipeline, households are set to undergo a period of adjustment.
“Some ways to cushion the impact, especially for lower income households, will be to provide cash handouts,” she said.
Meanwhile, HSBC Asean economist Yun Liu said private consumption has remained quite resilient, in part due to generous fiscal support and the ongoing recovery in the labour market. “We expect a recovery in the trade cycle to lead Malaysia’s growth in 2024 and some resilience in private consumption,” she noted.
On inflationary pressures, Liu, who expects the overnight policy rate to be maintained at 3% for this year, said inflation has been well contained. Headline inflation cooled from 2.5% in 2023 to 1.7% y-o-y on average in January and February 2024 .
She said the impact from elevated global rice prices has been partially blunted, thanks to the government’s efforts to ramp up domestic supply.
That said, Liu said upside risks to inflation remain, particularly from the changes in the 2024 budget, including a two percentage point hike in the services tax and some cuts to fuel subsidies, as well as a weaker currency.
“We expect 2024 inflation forecast to come in around 2.2%, but we are cautious on upside risks to inflation, given the uncertainty surrounding the exact timing of subsidy rationalisation,” Liu noted.
HSBC Asean economist Yun Liu.
Malaysia’s annual inflation rate unexpectedly rose to 1.8% y-o-y in February 2024 from 1.5% in the prior month, above market forecasts of 1.4%. Core inflation, excluding volatile fresh food items and administered costs, increased 1.8% y-o-y, the same pace as in January.
OCBC’s Lavanya said the bank’s forecast is for headline inflation to average 2.5% y-o-y, similar to 2023.
“We have, however, not considered the impact of changes to targeted fuel subsidies. Bank Negara’s inflation range at 2% to 3.5% is wide and signals further upside, given that the average of headline inflation in January and February was 1.6%,” she said.
RAM’s Woon projects average headline inflation for 2024 to come in at between 2.5% and 3%.
He said the inflation rate is likely to stay relatively moderate in the first half of this year, given the dissipating price pressures.
Woon however said it would likely rise in the second half of the year when targeted fuel subsidies are expected to be gradually rolled out.
“We remain watchful over the RON95 subsidy retargeting in the second half and any unintended price ripple effects from a poorly executed rollout. The retargeting of petrol subsidies, along with the continued cash assistance programme for lower-income households should help to cushion some of these inflationary pressures,” he said.
On a different but compelling note, Mohd Afzanizam describes 2024 as a cautionary year. He said while the hope is for the external sector to support local net exports, it still remains highly uncertain, adding that the bond yield curve inversion in the US Treasury (UST) markets are quite concerning.
“It has remained inverted since October 2022 with the spread between the 10-year UST yield and the three-months UST yield standing at minus 125 basis points. Similarly, the spread between the 10-year UST yield and the two-year period is currently at minus 34 basis points.
“The yield curve inversion happens when the short-term rates are higher than the long-term rates. That would mean the bond markets have been signalling that the interest rate is going to be lower at some point in the future.”
Mohd Afzanizam explained that when interest rates are lower, it would normally be associated with a weak economy, as the monetary policy would respond when economic growth starts to slow significantly.
“For now, the thesis is that the United States economy is able to reach a soft landing despite the successive Federal Reserve fund rate hike since March 2022. So, we shall see how this factor plays out this year and beyond,” he said.
