Lower producer prices signals slower growth

ECONOMIC growth has been slowing since peaking at 5.9% year-on-year (y-o-y) in the second quarter of 2024 (2Q24).

Although the government estimates annual gross domestic product (GDP) growth at 4.5% to 5.5% this year, Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour has indicated a potential downward adjustment due to US tariffs.

The March producer price index (PPI), an indicator of consumer prices, mirrors the slowdown by dropping 1.9% y-o-y, the first decline since November.

Month-on-month (m-o-m), the PPI declined 0.6%. For 1Q25 ended March 31, the PPI declined 0.3%, adding to the 0.8% drop in 4Q24.

The gauge tracks the ex-factory price, or what producers are paid at the first stage of the supply chain, including raw materials, intermediate goods and finished goods.

The PPI shows future consumer prices: a low PPI means lower prices at the start of the supply chain, and a high PPI means higher prices. These price changes move through the supply chain and affect the consumer price index (CPI), showing lower or higher inflation.

The PPI also reflects the economy’s health: higher prices (without supply-chain issues) suggest strong demand and a healthy economy, while lower prices indicate weaker demand and slower growth.

The release of PPI data follows the advance GDP data for 1Q25, which showed economic growth moderating to 4.4% after a 5% expansion in 4Q24. Since then, GDP growth revisions have been made, with the International Monetary Fund adjusting annual GDP to 4.1% from 4.7% and forecasting 3.8% growth for 2026.

The GDP revision might not be happening soon, but the Statistics Department plans to release annual GDP estimates along with preliminary 1Q25 GDP estimates on May 16.

The 90-day pause on the April 2 Liberation Day tariffs, announced by President Donald Trump, gives time to assess their economic impact and continue trade negotiations. While the 24% “reciprocal tariff” on Malaysia is paused, a baseline 10% tariff still applies.

Further fiscal reforms, including an increase in electricity tariffs and the rationalisation of the RON95 petrol subsidy in the second half of 2025, complicate the picture. It is understood that the current lower crude oil price will provide some leeway in making the necessary painful reforms, while low inflation may protect consumers.

Furthermore, businesses and households are now expecting Bank Negara to lower its benchmark interest rate.

Malaysia must rely more on its domestic economy due to external headwinds and supply-chain uncertainties.

Economists warn that job losses in export-reliant manufacturing subsectors could reduce demand in domestic-

oriented services. This sector includes significant contributions from micro, small and medium enterprises (MSMEs), which are vital to employment and growth.

MSMEs contributed almost 40% to GDP in 2023, and 61%

of that came from the services sector.

The Malaysian consumer remains confident, with a report from Mercury Securities on April 28 highlighting strong holiday bookings at the recent Matta Fair extending into 2025/2026.

A previous Ipsos survey on Feb 17 showed a 4% yearly rise in consumer confidence to 55% and a 2% monthly increase, driven by positive economic growth, stable inflation, job security, future investments and purchasing power.

Businesses, at least in 4Q24, mirrored the confidence of consumers, as seen in the Statistics Department’s business tendency statistics released last November, with the quarterly confidence indicator rising 4.8%.

It pointed out that all sectors expected better business prospects between October 2024 and March 2025. Other business sentiment surveys also showed optimism for the second half of 2024, but will it last given recent uncertainties?

On May 27, the Statistics Department will release the next business trend statistics that will provide clarity.

The lower PPI and early 1Q25 GDP suggest growth is moderating. While business and consumer sentiment indices seem positive, the outlook is becoming gloomier. This month’s data will provide a clearer picture of what lies ahead.