KUALA LUMPUR, 18 August 2023 — The Malaysian economy expanded by 2.9% in the second quarter of 2023, a slowdown from the robust growth of 5.6% witnessed in the first quarter. The report, “Economic and Financial Developments in Malaysia in the Second Quarter of 2023,” released by Bank Negara Malaysia, highlighted the impact of slower external demand on the nation’s economic growth.
Domestic Demand Remains Key Driver
Despite external challenges, domestic demand continued to be the primary driver of growth, bolstered by strong private consumption and investment. Household spending received a boost from sustained employment growth and rising wages. Investment activity was underpinned by capacity expansions, advancements in multi-year projects, and increased government spending on fixed assets.
Moreover, the recovery of inbound tourism provided a partial counterbalance to sluggish goods export growth. However, the growth rate in the second quarter was affected by the high base effect of 2022, when the economy experienced a strong rebound from reopening efforts and policy measures.
Supply Side and Inflation Dynamics
On the supply side, the services and construction sectors remained steadfast in their support of economic growth. Meanwhile, the agriculture and mining sectors faced challenges due to unfavourable weather conditions and plant maintenance.
Inflation dynamics were also discussed in the report. Headline inflation moderated to 2.8% during the second quarter, down from 3.6% in the first quarter. This moderation was observed in both non-core and core inflation. Factors contributing to the decline in non-core inflation included lower prices of fresh food and fuel. While core inflation saw a decline, it remained elevated compared to the long-term average.
Exchange Rate Volatility
Global developments played a crucial role in influencing Malaysia’s financial conditions in the second quarter. Dampened global financial market sentiments, primarily due to concerns over the global economic outlook and China’s weaker-than-expected rebound, affected the domestic environment. These factors were compounded by uncertainties surrounding the US debt ceiling crisis and expectations of continued monetary policy tightening in advanced economies.
The Malaysian ringgit experienced a depreciation of 5.8% in the second quarter. However, it rebounded by 1.1% in the third quarter as of 15th August 2023, amidst growing expectations that US monetary policy tightening was nearing its end.
Financing Conditions and Outlook
The report also examined financing conditions, noting a moderation in credit growth in the private non-financial sector. While credit to the private sector grew by 3.8%, outstanding business loans experienced slower growth, and outstanding corporate bonds improved.
Looking ahead, the Malaysian economy is projected to expand close to the lower end of the 4.0% to 5.0% range in 2023. This growth projection takes into consideration the challenging global environment, with domestic demand, resilient employment, income growth, and implementation of long-term projects providing key support. Risks to the growth outlook remain, primarily due to uncertainties in global growth.
Inflation Projections for the Second Half of 2023
Inflation is expected to further moderate in the second half of 2023. Both headline and core inflation are projected to trend lower, partly influenced by the higher base in the corresponding period of the previous year. However, these projections are subject to changes in domestic policies related to subsidies and price controls, as well as global commodity prices and financial market developments.
Bank Negara Malaysia’s Governor, Datuk Abdul Rasheed Ghaffour underscored the potential for both downside and upside risks to the growth and inflation outlook. While weaker-than-expected global growth remains a significant downside risk, the potential for stronger-than-expected tourism activity and faster project implementation could provide upside potential to Malaysia’s economic trajectory.
As the nation navigates through global uncertainties, Malaysia’s economic resilience, robust domestic demand, and cautious monetary policy stance are expected to play crucial roles in shaping its economic future.
