BMI revises Malaysia GDP forecast down to 4.0 per cent

KUALA LUMPUR - BMI, a Fitch Solutions company, has revised downward its forecast for Malaysia’s real gross domestic product (GDP) growth to 4.0 per cent in 2023, from 4.2 per cent previously.

BMI said the weaker-than-expected reading for the second quarter 2023 (2Q 2023) leaves its previous 2023 growth forecast of 4.2 per cent looking too upbeat, as it suggests that the local economy must grow by an average of 4.1 per cent year-on-year (y-o-y) in the second half of this year (2H 2023).

"However, this will be challenging to attain given the backdrop of weakening global demand and tight monetary conditions,” BMI said in a statement.

It said further analysis of the latest GDP figures showed an uptick in investment’s contribution to real GDP growth from 0.9 percentage points (pp) in 1Q 2023 to 1.1 pp in the second quarter.

However, BMI expects this momentum to be short-lived as high borrowing costs will weigh on domestic and foreign businesses’ appetite to borrow and invest.

To illustrate the changes that remain for businesses, Malaysia’s manufacturing purchasing managers’ index came in at 47.8 in July 2023 - the eleventh consecutive month it has been below the 50.0 level, implying contraction.

"Beyond domestic challenges, we maintain the view that weakness in global demand will keep a lid on Malaysia’s export performance this year.

"Indeed, net exports already removed 0.7 pp off GDP growth in 2Q, extending the -2.3 pp in 1Q. Year-to-date nominal figures further showed exports contracting by an average of 5.0 per cent y-o-y in the first seven months of the year, with a sharp contraction of 14.0 per cent y-o-y in June, although this eased to -13.0 per cent y-o-y in July.

"However, most of the weakness could now be behind us,” it said.

Malaysia’s economic resilience was mainly driven by consumption, but BMI expects this strength to falter as the impact of tight monetary conditions feeds through the economy.

BMI believes that Bank Negara Malaysia (BNM) has completed its hiking cycle at 3.00 per cent, with the overnight policy rate raised by a cumulative 125 basis points (bps) since May 2022 - the steepest since records began. It expects this will weigh on interest rate-sensitive sectors of the economy, including consumption and investment.

"In particular, we highlight that the initial pent-up demand following the removal of Covid-19 restrictions has eased, with households drawing down on savings since April 2022,” BMI said.

"That said, we are not expecting any rate cuts to materialise before the first half of next year, suggesting that monetary settings will remain tight over the coming months,” it added. - BERNAMA