Malaysia’s Q1 GDP growth beats forecasts at 5.6%, but momentum could slow as exports weaken

[KUALA LUMPUR] Malaysia’s economy grew more than expected in the first quarter of 2023, anchored by firm domestic demand. But with the bleak external outlook set to hurt exports, economists expect growth to moderate in coming quarters.

Malaysia’s gross domestic product (GDP) expanded 5.6 per cent year on year in the first quarter, according to official figures on Friday (May 12).

This beat the median forecast of 4.8 per cent by 21 economists in a Reuters poll. But it was slower than the 7.1 per cent growth in the fourth quarter of 2022, revised up from the previous figure of 7 per cent.

On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 0.9 per cent in the first quarter.

At a press conference on Friday, Bank Negara Malaysia governor Nor Shamsiah Mohd Yunus reiterated that Malaysia’s economy is no longer in crisis and “continues to gain strength”.

The central bank maintained its earlier full-year growth forecast of between 4 per cent and 5 per cent. Risks to the growth outlook are fairly balanced, said Nor Shamsiah, adding that downside risks are primarily from external developments and upside risks mainly from domestic factors.

The governor is also confident that the country will achieve full employment by the end of the year, as improved labour market conditions and the rebound in tourism activities continue to support growth.

“Tourist arrivals are expected to reach 20 million this year, and this is a conservative estimation,” she said, adding that Prime Minister Anwar Ibrahim’s recent visit to China will help to boost exports and tourism.

In Q1, the continued recovery of inbound tourism lifted services exports, “partially offsetting the slower goods export growth”, noted Department of Statistics Malaysia chief statistician Mohd Uzir Mahidin.

Strong employment growth and rising wages supported private consumption spending, he added. As for companies, investment activity “was underpinned by capacity expansion and continued implementation of multi-year projects”.

Slower growth ahead

Despite the better-than-expected Q1 performance, economists forecast that Malaysia’s growth will keep moderating due to external headwinds.

Oxford Economics senior economist Alex Holmes said the country will “struggle for momentum” in coming quarters due to shifting global consumption patterns and the global tech downcycle.

“We expect the weak trend in exports to continue as the resilience in advanced economies begins to fade. China’s reopening has so far provided little offset and is likely past its peak,” he said in a note on Friday.

In view of the tough external environment, Holmes believes Bank Negara’s full-year projection of 4 per cent to 5 per cent growth is “out of reach”. But he revised his own forecast upwards to “closer to 3 per cent”, from 2 per cent previously.

UOB senior economist Julia Goh said the country’s growth drivers have started showing signs of slowdown. For instance, Malaysia’s exports declined 1.4 per cent in March, the first contraction in 31 months, due to lower shipments of electrical and electronics products.

“Nevertheless, stronger investments, higher tourism activity and lower unemployment rate will be the brighter avenues in the second half of 2023,” she told The Business Times.

Given the better-than-expected print in Q1, UOB raised its full-year forecast to 4.4 per cent, from 4 per cent previously.

Centre for Market Education chief executive officer Carmelo Ferlito said as Malaysia’s economic growth is largely driven by domestic demand, it is crucial for the government to introduce more policies to spur private investment.

This will give a push to the manufacturing and services sectors, helping to maintain growth momentum in the coming quarters, he added.

Domestic demand keeps inflation high

Bank Negara also maintained its forecast for headline and core inflation to average between 2.8 per cent and 3.8 per cent this year, with risks tilted to the upside.

In Q1, headline inflation trended lower in line with moderating costs and supply conditions, noted Nor Shamsiah. Core inflation declined but remained elevated, reflecting resilient domestic demand.

“From what we observed, traffic jams and queues at the shopping malls showed that consumer spending remained strong. In fact, the retail spending growth is exceeding pre-pandemic levels,” she said.

Malaysia’s continued economic expansion led to the central bank’s decision last Wednesday to hike its key policy rate by 25 basis points to 3 per cent, after having paused rate hikes since November 2022.

As the move was earlier than expected, some economists do not expect further hikes.

Asked on Friday if more hikes are on the way, Nor Shamsiah said only that any decision made by the Monetary Policy Committee is based on the domestic and global environment, to ensure monetary stability that is conducive to sustainable economic growth.

Domestic policies should help to contain inflation pressures, said UOB’s Goh. For instance, the gradual removal of price controls could improve producer supply.