Resilient demand: Customers filling their trolley with groceries at a supermarket in Bayan Lepas, Penang. Household spending has endured against the backdrop of external challenges, signalling recovery strength.

Malaysia: Recession not likely

PETALING JAYA: Economists are taking a cautious stance on the economy, as global headwinds take a firm grip on the global macroeconomic landscape.

Not only will these challenges affect domestic demand, the key driver of the Malaysian economy, but can also affect the country’s exports and business sentiments overall, they say.

As a small and open economy, economists noted Malaysia cannot escape the knock-on effects of the global macroeconomic conditions.

At this juncture, they said Malaysia would most likely be spared from falling into a recession, but could head into technical recession if the economy worldwide deteriorates.

The looming global recession, inflationary pressures and geopolitical tensions affecting supply chains are some of the headwinds that could derail the domestic economic growth engine.

Malaysia went into a technical recession in the third quarter of 2021 (3Q21) due to the Covid-19 lockdowns. Technical recession is when there are two successive quarters of economic contraction.

OCBC Bank chief economist Selena LingOCBC Bank chief economist Selena Ling

Economists at this stage are forecasting gross domestic product (GDP) for this year to be between 4% and 5%, similar to Bank Negara’s official estimate, but said growth could be further impacted if headwinds worsened.

The central bank expects that growth would continue in 2023, but at a much more moderate pace due to slower external demand.

Last year, the economy grew by 8.7%, which was the strongest growth rate since 2000. The growth was fuelled by strong domestic demand, steady expansion in the external sector and continued improvement in the labour market.

On a seasonally-adjusted quarter-on-quarter basis, the economy contracted by 2.6% in 4Q22, after slowing down in the previous three quarters.

OCBC Bank chief economist Selena Ling told StarBiz that while the local economy is likely to be relatively resilient, it is not completely immune to the global headwinds, given its open economy and reliance on commodities and manufacturing, especially electronics.

She said the key risk is likely external, namely, arising from weaker-than-expected global growth prospects with recent idiosyncratic United States and European bank developments raising the spectre of financial market instability.

Any further escalation in geopolitical tensions could also weigh more heavily on the trade performance, she noted.

”The key domestic risk stems from elevated inflation, especially if the government plans to rationalise subsidies to be more targeted.

“The need to pursue a gradual fiscal consolidation strategy to reduce fiscal risks and put its debt on a downward path may also mean a more limited fiscal space to counter any economic shocks,” Ling said.

Global headwinds are not expected to cause a recession in Malaysia, as domestic demand is expected to remain resilient.Nadia MazlanGlobal headwinds are not expected to cause a recession in Malaysia, as domestic demand is expected to remain resilient.Nadia Mazlan

RAM Rating Services Bhd economist Nadia Mazlan said as a small and open economy, Malaysia cannot escape the ripple effects of global developments.

The immediate impact during times of market volatility, she said, as seen from the recent US banking crisis, typically fall on Malaysia’s financial markets and the ringgit as investors scramble to safe-haven assets such as US treasuries (UST).

As at press time, the ringgit was trading at RM4.41 to the US dollar.

“A global recession would likely lead to a substantial reduction in Malaysia’s export as global demand wanes and may play into dampened consumer and business sentiments, leading to sluggish spending.

“Meanwhile, high global inflationary pressures typically result in a steep rise in input costs and imported goods in Malaysia.

“Feeling the pinch, business and consumers would be inclined to cut spending which would translate to a more subdued GDP growth,” Nadia noted.

Currently, she said the global headwinds are not expected to cause a recession in Malaysia, as domestic demand is expected to remain resilient.

As seen last year, business and household spending endured against the backdrop of external challenges, signalling the strength in its recovery momentum, Nadia noted.

Other challenges to the domestic growth outlook include unresolved labour shortage issues and geopolitical risks, Nadia said.

Currently, the labour shortage gap has narrowed, but has yet to fully close, she said.

Given the dependency on foreign workers in sectors such as construction and plantations, growth may come in lower than expected if this issue prolongs, Nadia added.

Economists concurred that an escalation in geopolitical tensions such as the US-China trade dispute and the Russia-Ukraine war could also jeopardise growth if it disrupts supply chains or drives up commodity prices.

To this end, Nadia said the resulting higher cost of goods globally would likely impact the country’s economic growth through slower consumer spending.

Bank Muamalat Malaysia Bhd chief economist and social finance Mohd Afzanizam Abdul Rashid

Bank Muamalat Malaysia Bhd chief economist and social finance Mohd Afzanizam Abdul Rashid

Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said domestic trade and investment would be affected by the global headwinds.

Thus far, the data point seems to suggest that the Malaysian economy is still resilient.

“The latest print for export growth was higher at 9.8% year-on-year in February from merely 1.4% in the previous month.

“Despite that, business sentiment has been cautious with Malaysia’s manufacturing purchasing managers’ Index (PMI) lingering below the 50-point demarcation line for six months in a row.

“I suppose businesses are being cautious at the moment. This will have an impact on how they will plan for their labour hiring and capital expenditure,” he said.

Mohd Afzanizam, who is projecting GDP growth at 4% this year, said the rising cost of living would be the key factor that may impede GDP growth, as this would reduce the purchasing power, leading to cautious spending among households.

However, he remains sanguine on domestic demand as expansionary fiscal policy and accommodative monetary policy should help to mitigate the risks of much slower growth this year.

What matters now is that the government will continue its reform agenda and execute the Budget 2023 measures in a timely manner, he said.

RAM’s Nadia projects economic growth to come in between 4% and 5% this year. Domestic demand will continue to play a key role for growth this year, underpinned by the ongoing recovery in the labour market.

Higher international tourism activity would also lend support to growth, with China’s border reopening acting as a potential upside for the sector, she said.

OCBC’s Ling anticipates 4.4% GDP growth for this year, noting that domestic consumption would remain the key driver for growth, partly supported by continued improvement in the labour market conditions with the unemployment rate to fall to 3.5% this year from 3.6% in December 2022.

On inflation, she said it should moderate from last year’s 3.3% to around 3% this year. “Up to February 2023, the key inflation drivers were food and non-alcoholic beverages, as well as restaurants and hotels.

“Inflation is likely to normalise in the second half of this year, but something to watch will be the yet-to-be announced subsidy-rationalisation measures,” Ling said.

Nadia expects overall inflation to stay rather elevated at 2.7% this year, adding that much of the inflationary pressure this year is envisaged to be driven by food prices.

While headline inflation peaked at 4.7% in August 2022, food inflation remains stubbornly high and has yet to see a downward trend.

“Food inflation is envisaged to remain rather elevated for the rest of the year, although it is likely to moderate slightly as supply issues eventually resolve and high base effects from 2022 kick in.

“Transport fuel inflation could also pick up in the second half of this year amid potentially higher fuel prices from the imminent gradual implementation of targeted fuel subsidies, Nadia said.