WEIGHED down by a slowing global performance, the domestic economy is normalising to a gentle softening path in 2023.
The real gross domestic product (GDP) growth paced slower to increase by 5.6% year-on-year (y-o-y) in the first quarter of 2023 (1Q23) compared with 7.1% in 4Q22. On a seasonal quarter-on-quarter (q-o-q) comparison, the economy grew marginally by 0.9% in 1Q23 after contracting by 1.7% in 4Q22.
Resilient domestic demand growth, albeit slower (4.6% in 1Q23 versus 6.8% in 4Q22) continued to keep the economy running, offsetting a contraction in real exports (down 3.3% in 1Q23 versus an increase of 8.6% in 4Q22).
All economic sectors have slowed in 1Q23, with the services sector expanding by 7.3% in 1Q23 versus 9.1% in 4Q22 and growth in the manufacturing sector slowed further to 3.2% in 1Q from 3.9% in 4Q22.
Exports to be considerable drag on the economy, weighed down by slowing global demand, continued inventories adjustment in global semiconductor sales and moderating prices of commodity and energy.
The intensified US-China chip war and supply-chain disruption as well as China’s pursuit of semiconductor self-sufficiency risks leading to global overcapacity across industries and price wars in years to come.
Malaysia’s exports had slowed markedly to 2.8% y-o-y in 1Q23 from 11.8% in 4Q22.
Challenged by slowing global demand, moderating commodity prices as well as high-base effects in 2022, exports have already contracted for two consecutive months in March (down 1.4%) and down 17.4% y-o-y in April 2023.
Exports are expected to remain in negative territory, with a continuation of double-digit declines at varying magnitude for greater part of this year.
Consumer spending increased at slower rate of 5.9% in 1Q23 compared with 7.2% in 4Q22, reflecting a normalisation of households spending.
The near-term outlook for consumer spending would depend on how many households have more cash on hand now than they normally would want and how much of that they would spend as the economy slows.
There are a number of possibilities.
Firstly, the cash stimulus, especially the Employees Provident Fund withdrawals have already been spent.
Secondly, the spending boom known as “revenge spending” on travels and consumer services post pandemic had faded.
Thirdly, as spending normalises, the consumers could conceivably spend less on durable goods such as auto vehicles, bicycles, gymnasium equipment, electronic gadgets, electrical appliances, furniture, entertainment and travel.
Some of the durable goods bought previously won’t be replaced in the near-term as they are not going to wear out so soon.
Fifthly, higher interest rates (borrowing costs) would mean higher debt service payments for borrowers. A total of 53.4% of household loan accounts have floating-rate loans.
Although employment (unemployment rate is at 3.5% in March 2023) and income growth albeit at a slower pace, will continue to support growth in consumer spending, households are expected to return to a sustainable- spending mode.
Having to cope with inflation and higher cost of living, many consumers will remain cautious and spend discretionary amid concerns about a slowing economy.Private sector’s real wage growth grew by only 0.9% in 1Q23 compared with 1.7% in 4Q22 with nominal wage growth in the manufacturing sector (4.3% in 1Q23 compared with 5% in 4Q22) and services sector (4.6% in 1Q23 compared with 6.1% in 4Q22).
We estimate that private consumption will grow between 4.5% and 5% in the remaining quarters of 2023 against an average growth rate of 7.1% per annum from 2016 to 2019.
Next, private investment growth has turned weaker by 4.7% y-o-y in 1Q23 from 10.3% in 4Q22.
After a sharp decline of 11.9% in 2020 during the Covid-19 pandemic, private investment has recovered to increase by 2.6% in 2021 and 7.2% in 2022 (4.8% per annum in from 2016 to 2019).
The long-term average growth for private investment was 11.3% per annum from 2011 to 2019.
We expect the domestic business environment to remain challenging in the second half-year of this year, due to both external and domestic headwinds. Persistent external headwinds from the ongoing geopolitical tensions, high inflation pressure and lag impact of higher interest rates in some advanced economies, have dampened consumer and business spending.
This, in turn, will dampen demand for our manufactured goods and commodities.
Domestically, increased business cost pressure, high prices of raw materials, and the impact of higher borrowing cost as well as the anticipated rationalisation of subsidies are expected to add cost implication amid a slowing domestic demand.
Based on the Associated Chinese Chambers of Commerce and Industry of Malaysia’s business and economic condition survey for 2H22 and prospects for 2023, businesses are cautiously optimistic about the business conditions in 2H23.
A total of 37.9% of the respondents expect “better” business conditions in 2H23 compared with 29.5% in 1H23.
A total of 47.5% of the respondents maintained a “neutral” outlook. The manufacturing (58.2%) and wholesale and retail trade (41.6%) sectors are holding “neutral” expectations in 2H23.
Higher minimum wage, electricity tariff, interest rate and rental fees as well as the amendment to the Employment Law had resulted in increased operating costs and cash flow problems for businesses, according to the respondents.
What to expect in 2H23?
There are four key developments to look out for that will affect the domestic economy this year and beyond.
> Amid the rising uncertainty of the US economy due to the lag impact of higher interest rates, tighter liquidity and credit conditions amid concerns about a regional bank turmoil, the slowing global economy is looking to China’s reopening to keep it afloat. China’s April industrial output and retail growth undershot forecasts, along with a further decline in property investment, suggesting that the economy has lost momentum at the beginning of the second quarter.
South-East Asia’s hopes for a quick rebound in travel and tourism following China’s reopening have hit a speed bump over an unexpected snag.
During the five-day “golden week” period from April 29 to May 3, Chinese tourists flocked to domestic destinations and not many people have travelled abroad.
> The global interest rates hike cycle may be nearing an end.
Will the Fed pause interest rates at between 5% and 5.25% amid the still high headline inflation and core inflation as well as the financial risk coming from the recent regional bank turmoil?
Of particular concern to the Fed is the still strong labour market and rising wages, which could prompt a wage-price spiral to push up prices.
The Fed is expected to hold interest rate higher and longer until the cooling down of the job market and wage growth.
Therei s volatility in the financial market and foreign exchange markets given lingering uncertainties about the Fed’s narrative of a pivot.
> On the domestic front, the outcome of six state elections (Selangor, Negri Sembilan, Penang, Kedah, Terengganu and Kelantan) will be crucial. The state elections will also be a testing ground for the unity government. It will be the first major test for the former political rivals in the coalition to ensure continued political stability post the 15th General Election.
> Subsidy rationalisation will start in 2H23. Post the state elections, probably by August, we expect the government to embark on a gradual pace of subsidy rationalisation as it balances the fiscal sustainability and transitory impact on the economy and households.
Following the implementation of targeted subsidy for electricity tariff (medium voltage and high voltage users, including multinational companies), the government is preparing Malaysians for next phase of subsidy rationalisation, starting with targeted electricity tariff subsidy for households.
Next in line is targeted subsidies for fuel, including RON95 petrol and diesel next year.
The government will look for methods to coordinate and ensure the distribution of subsidies to targeted groups through the implementation of the household socioeconomic database, Pangkalan Data Utama (Padu), which is expected to be completed by the end of the year.
By focusing on households’ net disposable income, Padu aims to provide a more accurate assessment of their financial capabilities.Subsidy rationalisation on fuel, and electricity can have negative effects on macroeconomic indicators like the GDP through the rise in the cost of production, dampening of household spending and reduction in employment.
Nevertheless, the impact on the economy can be mitigated when savings from the removal of subsidies are given back to the economy through spending on productive sectors.