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The Malaysian economy saw year-on-year growth of 5.06% in the first quarter of 2023, propelled by robust domestic demand. Although Malaysia GDP growth in Q1 slowed on a sequential basis, it exceeded the expectations of market experts as well as the official figure of 4%-5% growth.
Last week, Bank Negara Malaysia (BNM) decided to resume its policy tightening after a brief pause earlier this year. The interest rate hike is meant to keep inflation in check as the country’s domestic demand continues thriving amid the global slowdown. BNM Governor Nor Shamsiah Yunus said, “The economy is no longer in crisis and has in fact continued to gain strength.”
BMN said the headline inflation in the first quarter fell from 3.9% to 3.6%. The central bank estimates the average inflation to be around 2.8% to 3.8% this year. Despite recording a significantly lower inflation rate than that of the Philippines, Indonesia and some Western countries, the Malaysian central bank did not shy away from persistent inflationary pressure due to geopolitical tensions, Chinese demand, exchange rate fluctuations and extreme weather conditions.
What aided Malaysia GDP growth?
The central bank gives credit to domestic demand as the main driver of Malaysia GDP growth in Q1, with improvements in the labour market and expansion in wages supporting private consumption. Unexpectedly strong tourism activity and large infrastructure projects are other factors.
On the Southeast Asian country’s trade, Oxford Economics stated, “While tourism arrivals have bolstered service exports, goods exports have been tumbling, led by shifting global consumption patterns and a turn in the semiconductor cycle. US-China trade frictions may also have had an impact. That saw exports of goods and services fall by 3.3% y/y in Q1, compared to a 7.2% rise in Q4 2022.”
As per the Malaysian Industrial Development Finance Research, BNM has prioritised its monetary policy on sustainable growth as the bank is likely to shift to a wait-and-see approach while monitoring the global situation. The central bank expects Malaysia GDP to expand between 4% and 5% in 2023, owing to the robust domestic demand. Risks to Malaysia’s growth outlook are relatively balanced, according to the BNM Governor.
The continuation of government cash aids and subsidies is helping private consumption growth. According to the Malaysian authorities, higher global commodity prices due to geopolitical tensions and extreme weather are the top risks to the price outlook. In contrast, weaker global demand and dwindling pent-up demand in Malaysia are the downside risks.
“We expect the weak trend in exports to continue as the resilience in advanced economies begins to fade. Indeed, the combined impact of past monetary tightening and harsher global credit conditions following bank failures in the US and Europe will likely tip important trading partners, such as the US, into a recession by the second half of this year. China’s reopening has so far provided little offset, with much of the rebound focussed on import-light domestic services, and China’s reopening boost is likely already past its peak,” Oxford Economics said in a note.
