Malaysia: GDP growthsustainable
PETALING JAYA: While Malaysia’s trade growth has started to decelerate in line with consensus expectations of a weaker global economy, industry analysts are of the view that strong domestic demand, particularly private consumption and private investment, will help to sustain the country’s gross domestic product (GDP) expansion this year.
Economic and financial data are signalling weaker quarters ahead for the local economy, which grew by 5.6% year-on-year in the first quarter of the year (1Q23).
The risk of the economy underperforming official forecast figures is rising due to the external front as the real economy of the developed world starts to feel the impact of monetary tightening and fading fiscal support while China’s recovery story dissappoints.
Prof Yeah Kim Leng, who is one of the recently-appointed finance advisers to Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, said the magnitude and unevenness of the decline remain uncertain, especially in the second half of the year.
“In the first four months, exports showed a 2.6% decline from the same period last year, indicating global slowdown has already affected Malaysia’s exports adversely,” he told StarBiz.
“With manufacturing capacity utilisation remaining high at 79.6% in 1Q23, the slowdown in external demand may not be damaging to the economy, especially if the much anticipated recovery in the China economy materialises in the second half,” he pointed out.
Yeah said a pick-up in the consumption-led growth of the Chinese economy soon would ease fears of a severe export downturn.
In March, Malaysia’s trade shrank marginally by 1.6% year-on-year (y-o-y) following a significant drop in commodity prices. Exports decreased 1.4% to RM129.7bil and imports fell by 1.8% to RM103bil.
The pace of decline picked up in April as trade dropped by 14.5% y-o-y to RM198bil in April and export value decreased by 17.4% y-o-y to RM105.4bil. Import value was down 11.1% y-o-y to RM92.6bil.
A further contraction for Malaysia’s external trade performances in 2Q23 is reflected in the pessimistic Purchasing Managers Index (PMI) recent readings from across the region
In a recent report, Fitch Ratings forecasts global trade growth in 2023 at 1.9%, down from 5.5% in 2022. The credit rating agency said supply-chain bottlenecks are not a key constraint on trade flows and the recent slowdown in trade seems more a reflection of slowing demand.
“The United States and global demand for consumer goods is weakening, which reflects the phase-out of US consumer-focused fiscal stimulus, monetary tightening and the rebalancing of demand back towards services after the lifting of Covid-19 restrictions,” it said.
“World industrial production is also decelerating rapidly. Services trade is rising, but services production is less globally specialised. The volume of world trade in goods is now falling, partially offset by a recovery in services trade as tourism and transport rebounds. But services account for only 22% of total trade and this is not enough to fully cushion aggregate trade growth,” it added.
Bank Muamalat Malaysia Bhd chief economist, market analysis and social finance head Dr Mohd Afzanizam Abdul Rashid said the sharp increase in interest rates last year in many jurisdictions, especially advanced economies, could have a toll on the country’s external demand.
“I am projecting nominal exports to grow by only 4% to 5% this year. Expansionary fiscal policy along with accommodative monetary stance would allow the aggregate demand to record sustainable growth this year. The labour market is expected to return to full employment status this year which means consumer spending will continue to support domestic demand. The implementation of infrastructure projects could also help to promote investment activities in 2023,” he said.
Despite the headwinds, Bank Negara last month stood by its GDP growth target of 4% to 5% this year. The central bank said growth would be underpinned by firm domestic demand.
Fitch noted that the United States, China, and Germany recorded a sharp decline in import growth last year. While China saw an outright contraction of 5%, US import growth slowed by six percentage points to 8% and Germany’s import growth declined to 6% from 9%. For 1Q23, China and US imports decreased by 1% and 2% y-o-y respectively.
“The shift away from a predominantly investment and export led growth model to a more consumer and services oriented economic structure (pandemic disruptions notwithstanding) has seen the ratio of imports to GDP declining in China. Growth has become less import-dependent and more concentrated on domestic manufacturing and consumption,” it said.
It added world goods trade follows the industrial production cycle more closely than GDP as goods production is more internationalised and while some evidence of trade redirection is emerging, there is no evidence at this stage that globalisation is going into reverse.
Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said the shift in global demand towards respective local services rather than cross-border merchandise good has contributed to the weaker external environment.
“What is fortunate so far is that the dynamism in the domestic economy remains robust. The government needs to take a measured walk between subsidies reform, which will cause rising prices and erosion in households’ purchasing power that could dampen the dynamism, and economic growth. Reform requires growth to make public acceptance easier,” he said.
Malaysia University of Science and Technology economics professor Geoffrey Williams said the weaker ringgit also bodes well for the country’s exports, making local product and services cheaper and in turn partly sustain exports in the short-term. He said government spending is key in achieving the GDP target this year.
“The only option is to work harder to find export markets, make Malaysian products more attractive and competitive, as well as focus on factors that can be influenced by domestic demand. Without government spending underlying growth would be much weaker and even in recession as is seen in many other countries,” he said.
Centre for Market Education (CME) chief executive officer Dr Carmelo Ferlito said given the role China plays in trade with Malaysia, the country’s trade figures may see further weakness on the back of a softer recovery in the Chinese economy thus far. Policy makers need to think long term for the economy to become more resilient.
“Malaysia has de-industrialised too early and too fast, remaining heavily dependent on low added value export (raw materials). Without a long-term and complex strategy aiming at rebuilding the investment and manufacturing ecosystem, there is little that the government could do in the short term. The only short-term measure is to diversify trade partnership to gradually become less dependent on China,” he said.
The change to remedy that could be presented by the US-China geopolitical tensions and China losing its low cost comparative advantage, according to Nomura Group.
It believes, under the “flying geese paradigm”, the US-ChIna issue has set the stage for South-East Asia and India to become the Asia’s new high-flying geese, unlocking their full growth potential, helped with domestic and foreign investments.