Malaysia Q4 GDP growth up 7% on year; not likely to enter recession in 2023: central bank

[KUALA LUMPUR] Malaysia’s economy exceeded expectations to expand 7 per cent year-on-year in the fourth quarter, partly due to robust domestic demand, said the central bank on Friday (Feb 10).

The final figure was higher than an average forecast of 6.6 per cent by a group of 21 economists in a Reuters poll. Still, the Q4 growth was far less than the 14.2 per cent recorded in the third quarter, although that was largely due to a healthy rebound from 2021 when the country suffered due to the pandemic.

At a press conference, Mohd Uzir Mahidin, the chief statistician at the Department of Statistics Malaysia, noted that the fourth-quarter growth was still above the long-term average of 5.1 per cent.

“The private sector remained the key driver of growth, supported by private consumption and investment,” he added.

For the full year, gross domestic product (GDP) came in at 8.7 per cent higher than in 2021. This turned out to be the fastest full-year growth in 22 years and beat the central bank’s earlier forecast of between 6.5 per cent and 7 per cent. It was also higher than the majority of forecasts by analysts, which ranged from 8.2 per cent to 8.5 per cent.

Speaking at the same briefing, Bank Negara governor Nor Shamsiah Mohd Yunus told reporters that, despite the economy registering a decline of 2.6 per cent quarter-on-quarter in December, she expects Malaysia to avoid a recession in 2023 amid the global slowdown.

“The economy will continue to grow at a much more moderate pace because of the slower external demand, but it will still be supported by domestic demand,” she said. “We will not go into recession this year, as the labour market continues to improve with more jobs opening, led by growing demand in the electrical and electronics sector and tourism sector.”

The government’s official forecast for 2023 is for growth to slow to between 4 per cent and 5 per cent, but Nor Shamsiah noted that this range could be revised when Prime Minister and Finance Minister Anwar Ibrahim delivers the Budget in Parliament on Feb 24.

The governor noted that the balance of risks of growth remains tilted to the downside due to weaker global growth, tighter financial conditions, escalation of geopolitical conflicts and worsening supply chain disruptions.

The weaker global demand has weighed down Malaysia’s exports, with December’s exports easing to 6 per cent, after 16 consecutive months of double-digit growth.

“Nevertheless, this will be partly cushioned by improvement in exports of services, given further recovery in tourist arrivals amid the reopening of China’s borders,” said Nor Shamsiah.

Despite Malaysia’s growth exceeding market expectations, economists are taking a cautious view on the country’s outlook. UOB Research, for instance, is keeping its “cautiously optimistic” outlook.

In a note on Friday, UOB economists Julia Goh and Loke Siew Ting agreed that the softening external demand and ongoing global tech downcycle will affect Malaysia, while China’s reopening may not have significant impact in the first six months of 2023 amid capacity constraints and inflation risks.

“Statistical comparison base effects may also come into play as most economic and social activities start to normalise after a year of full reopening since April last year… Therefore, we remain cautious amid lingering headwinds, thus keeping our 2023 real GDP growth projection of 4 per cent for now,” said the report.

Geoffrey Williams, economics professor and dean of the Institute of Postgraduate Studies at the Malaysia University of Science and Technology, noted that the quarter-on-quarter performance was “not rosy at all”.

“The 2.6 per cent contraction is the first stage of technical recession and this has reflected the slowdown in all economic sectors, except the agricultural sector,” he told The Business Times.

“The slowdown reflects deep damages caused by the lockdowns and the policy mistakes of pushing excessive demand last year forcing growth that is inconsistent with the underlying supply potential of the economy,” Williams added.

Barclays economist Brian Tan noted that the seasonally adjusted level of headline GDP remained above trend in Q4, which reflected the normalisation of private consumption and goods-export weakness.

“We expect manufacturing activity to soften further this year, but the impact will be offset by the services sector recovery driven by the revival of international travel, especially as China reopened its borders,” he said.

Meanwhile, Malaysia’s headline inflation moderated to 3.9 per cent in the fourth quarter of 2022, from 4.5 per cent in the previous three months. The moderation was mainly due to the lapse in the base effect on electricity inflation and downtrend in key global commodity prices, said the central bank governor.

She noted that core inflation increased to 4.2 per cent during the period, from 3.7 per cent in the third quarter, driven by continued strength in demand amid “a still-elevated cost environment”.

For 2022, headline inflation increased to 3.3 per cent and core inflation averaged at 3 per cent.

“Headline and core inflation are expected to moderate but remain elevated this year amid lingering cost and demand pressure,” said Nor Shamsiah, adding that the inflation outlook will be affected by changes on domestic policy and commodity prices.

On monetary policy, Bank Negara unexpectedly paused the rate hike in January, a move that Nor Shamsiah said will allow the central bank to have more time to assess the cumulative impact of previous rate hikes of 100 basis points last year, which have pushed the overnight policy rate to 2.75 per cent.

UOB Research and Barclays maintained their projection of one more hike of 25 basis points in the first half of 2023.

Barclays’ Tan expects the rate hike to happen in March, as Bank Negara reiterated that “the stance of monetary policy remains accommodative and supportive of economic growth”, which implies the tightening cycle is not over yet.

The ringgit weakened 0.5 per cent to 4.33 against the greenback as at 6 pm on Friday. Year-to-date, the currency has appreciated 1.6 per cent.

Nor Shamsiah said the strength of the US dollar has moderated since November last year, as markets began to anticipate a smaller interest rate hike by the Fed. “The ringgit will remain on this appreciation path this year,” she added.