@ the IERP® Global Conference, August 2023
Presented by Dr Ray Choy, Chief Economist, Economic Research Department, MARC, this session covered global economic growth and the economic outlook for Malaysia. Malaysia was recovering, Dr Choy said; GDP growth is forecast to strengthen from 4.2% in 2023 to 4.5% in 2024. However, global economic growth was expected to pick up only slightly in 2024, by about 0.1%, and inflation was expected to cool. While global interest rates have increased, major economies are expected to slow in the second half of 2023, although Asia’s slowdown is likely to be milder. Emerging markets were expected to be core contributors to global GDP growth, given their faster rate of growth. Despite some negative views of China’s growth rate and property market malaise, GDP growth in markets in Asia are set to be a stabilising force for economic growth.
On Malaysia’s economic outlook, he said that tax collection was on track to reach its target but the fiscal deficit was cause for some concern. There was a movement towards fiscal consolidation over time. A positive development was that tourist arrivals could underpin firmer growth in 2024. “A higher tourism contribution to GDP is expected,” he said.
In terms of inflation, which has been one of the biggest worries in the last few years, costs are generally expected to normalise. Generally, however, there were inflation concerns globally, and commodity prices were still above pre-pandemic levels. He remarked that costs were not coming down in a substantial manner. “We are just seeing normalisation of costs, such as in global shipping and freight costs, which are starting to decline,” he said.
A major issue was global interest rates, which have changed quite a lot with inflation. “GDP growth is stabilising, and inflation is expected to decelerate,” he continued. “Stability and interest rate cuts, going forward, may be the potential major drivers of economic growth in the next one or two years.” The US and European Central Bank will be the central banks cutting interest rates more aggressively relative to the Asian economies, he noted. “China has cut interest rates but that was in response to specific internal problems faced by its property sector,” he explained, adding that Asia’s central banks were expected to stabilise interest rates, rather than institute large rate cuts.
However, in the second half of 2023, there was still the risk of interest rates rising, largely due to inflation, leading to rate cuts being more likely in 2024, than in 2023. There will probably be rate cuts in the US and Latin America. “Latin America, particularly, has been plagued by inflationary problems,” Dr Choy said. But this is not the case in Asia, where inflation is relatively more contained, and interest rates are cut one step at a time. “Interest rate cuts in Asia next year will likely be smaller due to the volatility and depreciation of some Asian currencies,” he said. Meanwhile, commodity prices remain elevated and continue to contribute to inflation, and asset prices and property prices have been holding up in the US. “China’s property market is in the early stages of the reversal of the overly-inflated property prices,” he said.
Major economies are expected to slow in the second half of 2023, leading to a shift in the interest rate trajectory. For instance, China’s manufacturing has been significantly affected and decreased quite a lot but the decline has not been beyond historical boundaries. The slowdown in Asia will not be significant, he said. “One of the things we often hear is the risk of external volatility caused by the higher interest rates in the US and the broader slowdown in China,” he remarked. “But it is important to note that Malaysia has had double digit export rates during the recovery and GDP growth has held up well. The domestic economy and consumer spending has been an important buffer, holding up the overall growth rate.”
Consumer spending was trending upwards, trying to sustain above pre-pandemic levels. “Consumption indicators are strong in Malaysia’s case, and its CPI is elevated, following global trends,” he said. The policy interest rate has not been as aggressive compared to other economies like US and Europe, and Malaysia has been able to maintain the interest rate policy. Many people are not happy about the actual rate of inflation but general trends suggest that Malaysia’s CPI is still low – in the low single digits. Higher GDP growth has led to growth in tax collection; this is largely within target and will continue to help the country’s plan of fiscal consolidation.
There is concern over Malaysia’s exchange rate, with a lot of discussion with regards to depreciation of the currency. However, the depreciation will be limited, as there has been increased FDI in Malaysia especially in 2022. The government has announced MoUs with China to bring in additional FDI, and in terms of overall FDI, it’s still largely in line with averages. Malaysia must improve on its current account balance to GDP ratio if it wants to strengthen the Ringgit, which used to trade at a much stronger level than it does today. “This is a structural weakness we have seen for more than20 years,” Dr Choy said. He pointed out that tourist arrivals have improved, post-pandemic, but has yet to return to pre-pandemic levels.
Tourism is expected to aid in the recovery of the current account. Although there was a time when tourism was better in Malaysia, the decline due to the pandemic was part of a regional trend, and tourism should not be underestimated as a contributor to GDP. Dr Choy said that although it was small now, it could contribute to 5% of GDP from very weak level during the pandemic, if it returned to pre-pandemic levels. There is quite a lot of potential for Malaysia to regain some of its external foreign exchange balances as tourism improves.
He noted divergence between the Malaysian equities and bond markets; inflows in the bond market and outflows from the equity market were largely a function of overall risk diversion caused by the China factor, and higher global interest rates and currencies. “Bursa has under-performed generally, but so have other markets,” he said, noting that regionally, Bursa has not done too badly. Local credit spreads were ‘peacefully uneventful’ while the corporate bond market was still good. If the US starts to cut interest rates, financial funding conditions are likely to improve, and once solutions are offered to the Chinese property developers, the market will improve.
Global and Malaysian growth is expected to pick up slightly, going forward into 2024. Malaysia’s GDP growth will continue to be supported by domestic demand and if there is anything above trend, it will come as a surprise from an external sector, or the tourism sector in Malaysia’s case. “Inflation is cooling so that will give central banks and fiscal authorities more flexibility to enact their required monetary and fiscal policies as potential buffers for GDP growth,” he said. “Finally, there were major changes in monetary policy stance over the last two years, and this will also be the case in the year going forward. There will be eventual shifts in global interest rates, between the G3 and emerging markets, but central banks will largely stabilise interest rates at current levels for now.”
