Malaysia’s Q3 GDP growth beats forecasts at 3.3% amid declining exports
Tan Ai Leng
[KUALA LUMPUR] Malaysia’s economy continued to expand in the third quarter of 2023 due to strong domestic demand that softened the impact of weakening exports, the central bank said on Friday (Nov 17).
Gross domestic product expanded by 3.3 per cent in Q3, which was in line with advance estimates released in October by the Department of Statistics Malaysia.
The growth was higher than the second quarter’s 2.9 per cent and also exceeded the median forecast of 3 per cent by a group of 20 economists in a recent Reuters poll.
Bank Negara Malaysia governor Abdul Rasheed Ghaffour said resilient domestic spending, improved employment and rising tourism activities bolstered growth, although the pace of expansion was dragged down by declining external demand and mining production.
“Despite the challenging global environment, the economy will continue to expand driven by improved employment and income prospects, the realisation and progress of multi-year projects, the global tech-cycle rebound, and robust tourism activities,” he said at a press conference.
From July to September, the growth on the supply side was driven by the service, construction and agriculture sectors.
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In a quarterly comparison, growth in services and construction accelerated to 5 per cent (from 4.7 per cent) and 7.2 per cent (from 6.2 per cent), respectively, in the third quarter.
For the first nine months of the year, growth moderated to 3.9 per cent, compared with 9.2 per cent during the same period last year.
Bank Negara expects GDP to expand by around 4 per cent this year. The central bank has forecast a slightly better growth range of between 4 per cent and 5 per cent in 2024.
“The growth outlook remains subject to downside risks stemming primarily from weaker-than-expected external demand, as well as larger and more protracted declines in commodity production,” said Abdul Rasheed.
With an anticipation of “rosier economic prospects” in the coming quarters and moderating inflation growth, economists expect Bank Negara to keep the overnight policy rate (OPR) unchanged at 3 per cent throughout 2024.
RHB Research economist Chin Yee Sian and associate research analyst Wong Xian Yong wrote in a report on Friday: “Domestic demand is expected to be driven by investment spending, spurred by the continuation of large-scale transport-related projects and business-friendly policies. The robust labour market will continue to fuel consumer-spending momentum.”
RHB maintained its 2023 GDP growth forecast at 4.3 per cent, and 4.6 per cent in 2024.
Turning to inflation, both headline and core inflation moderated in Q3 due to easing cost pressures.
From July to September, Malaysia’s headline inflation eased to 2 per cent from the previous quarter’s 2.8 per cent. Core inflation moderated to 2.5 per cent from the second quarter’s 3.4 per cent.
Headline inflation fell to a 30-month low of 1.9 per cent in September, while core inflation eased significantly from November 2022’s peak of 4.2 per cent year on year to 2.5 per cent in September.
Abdul Rasheed expects headline inflation to average between 2.5 per cent and 3 per cent this year, and between 2.1 per cent and 3.6 per cent in 2024. He stressed that changes in domestic policy on subsidies and price controls, as well as in global commodity prices, will affect the inflation outlook.
BMI, a unit of Fitch Solutions, said Malaysia’s year-to-date inflation readings are on track to meet the central bank’s forecast for core and headline inflation, and hence “reduces the pressure on the government to intervene” through interest rate adjustment.
Although the government is contemplating revising subsidies and price controls next year, Bank Negara will unlikely change its monetary policy as this will lead to the risk of destabilising the ringgit and exerting further downside pressure on the currency.
Barclays’ senior regional economist Brian Tan said that, contrary to popular belief, the ringgit has not been a significant driver of Bank Negara’s past monetary policy decisions.
He added that the more plausible trigger for a rate hike will be the rationalisation of the petrol subsidy as this will have a direct impact on inflation. But this may not materialise soon due to the challenging political backdrop.
The ringgit is the worst-performing currency in South-east Asia, falling over 6 per cent against the US dollar year to date. As at 7.30 pm on Friday, the ringgit was trading at RM4.68 against the greenback.
Abdul Rasheed said the currency depreciation “does not reflect its economic strength” as the ringgit appreciated by 1.4 per cent against a basket of major trading partner currencies, as indicated by the ringgit nominal effective exchange rate.
The expectations of a higher-for-longer interest rate environment in the US, and concerns over the escalating geopolitical tensions have contributed to a persistently strong US dollar. This has affected other major and emerging market currencies, including the ringgit, he pointed out.
“Global financial market uncertainties are expected to ease as financial markets expect the US policy rate to be reduced next year,” the governor said. “This should ease US dollar strength and thus reduce depreciation pressure on the ringgit.”
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