Malaysia GDP eases to 2.9% in Q2; slowest growth in nearly two years

[KUALA LUMPUR] Malaysia’s economy saw slower growth of 2.9 per cent in the second quarter from a year earlier due to declining exports, the central bank said on Friday (Aug 18).

The expansion was lower than Q1’s 5.6 per cent, and also below the forecast of 3.3 per cent growth by a group of economists in a recent Reuters poll. This is also the slowest growth in seven quarters.

At a press conference, Bank Negara Malaysia’s new governor Abdul Rasheed Ghaffour attributed the slower growth to weaker external demand amid a global tech downcycle, lower commodity production and a high-base effect from last year.

“Risks to Malaysia’s growth outlook are subject to downside risks stemming from concerns over a slower global economic outlook, and a weaker-than-expected rebound in China’s economy,” said Abdul Rasheed, who assumed his new position on Jul 1 this year.

For example, the US debt ceiling crisis, which occurred in May, together with the ongoing monetary policy tightening in many advanced economies have affected the world’s emerging markets including Malaysia.

During this period, lower commodity prices and global semiconductor demand have also weighed on Malaysia’s financial markets, said Abdul Rasheed.

He noted that domestic demand and private sector expenditure remain the key drivers of growth.

“Continued recovery in inbound tourism partially offset the slower goods export growth,” he said.

On the supply side, Malaysia’s services and construction sectors continued to support the country’s economy, but the agriculture and mining sectors were affected by this year’s hot weather and insufficient plant maintenance.

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Taking these factors into consideration, the governor said he expects Malaysia’s full-year economic expansion to come in at the lower end of Bank Negara’s earlier forecast of between 4 per cent and 5 per cent.

In view of the bleak global outlook, economists are lowering their projections on Malaysia’s gross domestic product (GDP) growth this year. UOB and OCBC have revised their full-year GDP forecasts to 4 per cent from 4.4 per cent previously.

In a co-authored report, UOB economists Julia Goh and Loke Siew Ting said Malaysia’s economic growth is on an easing trend from its peak in Q3 last year, dragged by challenging global conditions.

With domestic demand remaining as a key economic driver, they expect the government to retain the bulk of subsidies, including the costly fuel subsidy, to alleviate the living cost burden.

Oxford Economics senior economist Alex Holmes said Bank Negara’s GDP forecast of 4 per cent to 5 per cent “looks unattainable”, and that this will remove any appetite for interest-rate hikes, and even lead to rate cuts.

Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid shared a similar view, noting that the government needed to play a bigger role in introducing more conducive policies to spur domestic investment and private sector expenditure.

“The government would need to speed up the infrastructure development to generate a multiplier effect on the domestic economy,” he told The Business Times.

Turning to inflation, the central bank said that headline inflation in the second quarter continued to moderate to 2.8 per cent from the previous quarter’s 3.6 per cent. From April to June, core inflation eased to 3.4 per cent from the first quarter’s 3.9 per cent.

Although core inflation continues to decline, Abdul Rasheed said it remains elevated relative to its long-term average of 2 per cent from 2011 to 2019.

These pressures are also weighing on the ringgit’s performance, he said. In the second quarter of 2023, the ringgit depreciated by nearly 6 per cent against the US dollar. As at 6 pm on Friday, the ringgit was trading at RM4.65 to the greenback.

In a separate statement released by the Department of Statistics Malaysia on Friday, Malaysia’s exports continued to fall. In July, exports declined by 13.1 per cent year on year to RM116.8 billion (S$34 billion). This is the fifth month the country saw exports shrinking due to lower shipments of manufactured goods.

The decline was also faster than the earlier projection of 11.3 per cent by 16 economists in a Reuters poll.

In July, imports weakened by 15.9 per cent year on year to RM99.7 billion. Malaysia’s trade surplus rose 7.9 per cent to RM17.1 billion.

In the period from January to July, exports, imports and total trade flattened by 5.9 per cent, 6.5 per cent and 6.1 per cent, respectively, while trade surplus decreased by 2.5 per cent.

On the exports outlook, Bank Negara said it remains cautious even as it expects exports to recover gradually in the coming months with the anticipation of a global economy rebound and the bottoming-out of the global tech downcycle.