Malaysian Economic Outlook 4th Quarter 2022
FOURTH QUARTER SPELLS AN ENCOURAGING 2022
Malaysia entered the fourth quarter of 2022 in a remarkably different position to where it stood just one year prior. The year has been a hugely important one geopolitically, not only for Malaysia but across the world. At the same time last year, while economic activities were largely reopening internally thanks to the successful rollout of the Covid vaccination programme in Malaysia, significant restrictions were still present, most notably on international travel into the country. By the beginning of Q4 2022, except for a very small number of continued policies such as a mask mandate on public transport, social and economic life had almost entirely returned to pre-pandemic norms.
While the threat from the Covid pandemic has been reduced to a manageable level worldwide and in Malaysia, other geopolitical threats have arisen, most notably the continuing Russia-Ukraine conflict, which could potentially lead to wider conflict, especially with no attempts at diplomatic deescalation; and its impact on supply chains worldwide. The issue of unaffordable oil prices combined with the ever more pressing need to combat the climate emergency have posed a double-edged challenge for global governance. Q4 2022 has also been a significant period of change for Malaysia politically, with the 15th general election seeing the first ever hung parliament, and the first ever ‘unity government’ in Malaysian history, with a Cabinet composed of members from across four political coalitions.
Globally, recovery from the worst public health crisis in over a century, and the huge economic and social turmoil caused by that, as well as an increasingly tense geopolitical climate (most notably Russia-Ukraine, but also increasing tensions between the US and China) spell a difficult period in the coming months and possibly even years. In developed countries in the West, high inflation combined with stagnant wages are resulting in industrial action and discontentment in many places. Relatively, therefore, we may see Malaysia’s high but manageable inflation and high consumer sentiments as encouraging, as well as the relative stability of the unity government following almost two years of political instability. Nonetheless, in the coming months and years Malaysia will be faced with a challenge of protecting the welfare and wellbeing of the rakyat from an increasing cost of living, and encouraging investment into the country, while also achieving fiscal and debt sustainability and maintaining prudent and sound public finance.
Malaysia’s GDP growth has been higher than expected throughout 2022, with a very significant 14.2% year-on-year growth for Q3 2022. Although figures are not yet available for Q4 2022, Malaysia is expected to have an overall GDP growth rate for 2022 exceeding predictions of 6.5-7.0%. Considering the encouraging factors that were at play over the year, it would be reasonable to estimate growth for the year to be approximately 8.3%.
Despite this stronger than expected performance, Malaysia’s growth is expected to slow down in 2023, with the Ministry of Finance predicting growth for 2023 at 4.0-5.0%. The International Monetary Fund forecasts in the October 2022 World Economic Outlook have a similar prediction of 4.4%. Based on these forecasts, we can possibly see a modest growth of 4.0-4.5% in 2023 for Malaysia, although plenty of positive factors could push this cautious estimate up or higher, most notably the extent to which the newly elected ‘unity government’ can handle consumer fears around supply chains and inflation. This modest growth is similar to real GDP growth levels in 2016 and 2019. Within the region, the IMF forecast for Malaysia is lower than the forecasts for Indonesia, the Philippines, and Vietnam, but higher than the forecast for Thailand. The January 2023 World Economic Outlook provides an overall forecast for the ASEAN-5 (the five countries just mentioned) of 4.3% in 2023 and 4.7% in 2024; based on the previous forecasts, this would suggest Malaysia should largely be in keeping with the region. It is also encouraging that growth is expected to pick up slightly in the region in 2024 compared to 2023.
The Consumer Sentiments Index shows that Malaysian consumers maintain a positive but cautious outlook. The CSI score for Q4 2022 has risen to 105.3, an increase of 6.9 points compared to Q3 2022 and 8.1 points compared to Q4 2021. It is the second quarter in 2022 where the CSI breached the 100 threshold. Compared to Q3 2022, a smaller proportion of respondents said that their finances had improved this quarter (14% vs 19%), but at the same time, a smaller proportion of respondents said that their finances had worsened (29% vs 33%), suggesting a ‘smoother’ outlook this quarter. However, customer sentiments have been pushed up thanks to expected increases in incomes and job opportunities, and expected decreases in inflation among consumers. Nonetheless, planned consumer spending remains cautious, with consumers intending to save more in case of a future downturn, and now that post-Covid ‘spending excitement’ has largely slowed.
On the business side, outlooks are much gloomier. The Business Confidence Index for Q4 2022 is down to 85.9, a significant drop from Q3 (99.8 points) and at a level well below the threshold and consistent with previous outbreaks of Covid. Several factors contribute to this low confidence. Companies have seen significant drops in sales, with both domestic and external orders reduced. There has been a disruption to production volume in many industries, with 68% of manufacturers reducing their production volumes for Q4 2022. Inventories have therefore increased, but at a slowing rate as capital utilisation is reducing. While these challenges may be largely down to external shocks, and not having a significant effect domestically as demonstrated by the higher-than-expected growth, it could take some time for businesses to regain confidence given the various worldwide imbalances.
Inflation remains high with a CPI of 4.0%, a reduction from the Q3 2022 peak of 4.7% but higher year-on-year than the November 2021 level of 3.3%. Concerningly, food inflation, as measured by prices on food and non-alcoholic beverages hit a peak of 7.3% in November 2022, higher than any other month in 2021 or 2022. As food and beverages is a significant proportion of expenditure for B40 households, ever-increasing food prices may become an increasing priority for the unity government. Fortunately, on the other hand, inflation on housing and utilities has dropped from an August peak of 4.1% to just 1.4% in November 2022. Inflation on transport costs remains largely stable at 5.0-5.2%, a significant drop since Q4 2021 levels of 9.5-12.7%.
While inflation remains a concern, it should be noted that inflation levels in Malaysia remain significantly below the global level of 8.8% according to the IMF. Global inflation for 2023 is forecasted to reduce slightly to 6.5% as oil prices are expected to drop from $98 to $86 a barrel, although still significantly above the 2021 price of $69 per barrel. Malaysia has been largely sheltered from this impact as a result of its own natural resource supply as well as continued subsidies on petroleum products, benefitting a wide spectrum of consumers - nonetheless, stabilising inflation worldwide will hopefully have a knock-on effect for Malaysian consumer prices in 2023 as well.
Employment rates have remained largely stable quarter-on-quarter, while still representing an improvement from Q4 2021, with labour force participation rate increasing from an average 68.9% to an average 69.8%, and unemployment rate decreasing from an average 4.3% down to 3.6%. Since a small upturn in Q2 2021, Malaysia has been seeing a consistent month-on-month reduction on unemployment for a year and a half.
When it comes to international trade, October’s balance of trade was lower year-on-year (18 mil vs 26 mil), while November’s was slightly higher (22 mil vs 19 mil), suggesting no significant change overall. Quarter-on-quarter the balance of trade reduced slightly, largely down to a positive spike in September 2022. Imports grew significantly faster than exports in October (29.1% vs 14.9%), while in November the two were balanced with 15.6% growth on both sides. Year-on-year growth in both imports and exports in Q4 2022 is below Q4 2021 and very significantly below Q3 2022.
Industrial production growth has shown a downturn with an average of 4.7% across October and November 2022, compared to an average of 12.3% in Q3 2022 and even below the average of 6.9% for Q4 2021. Although production is low, it still remains above the sharp downturns seen during spikes in Covid-19 cases earlier in 2021. Considering each division, mining has shown an improvement year-on-year, from an average 1.1% loss in Q4 2021 to an average 7.4% gain across October and November 2022; however, this still represents a reduction on a quarterly basis. Electricity production has shrunk below Q3 2022 levels to a similar level to Q4 2021 figures, while manufacturing has seen a significant slump both year-on-year and quarter-to-quarter, with October 2021 even seeing a 1.9% contraction.
The Malaysian government finished the first three quarters of 2022 with an overall deficit at RM51.9 billion. This is a significant improvement from 2021 and 2020, with a total deficit for the year of 98.8 billion and 87.6 billion respectively. Most notably, Q3 2022 saw a significant reduction in the quarterly deficit to 7 billion. There are therefore encouraging signs of bringing public finances under control, following the necessary huge spending and borrowing throughout the pandemic. On the other hand, Q4 2022 saw the 15th general election and therefore also saw significant spending promises made by all political parties and coalitions.
The 2023 budget was also tabled on 7 October, before the general election. The budget includes very significant spending commitments across a broad range of focus areas, most notably in financial support for B40 households and the lower end of the M40 group to combat the rising cost of living. Tax cuts are also proposed for small and medium-sized enterprises. The measures proposed in the 2023 budget can be considered welcome in supporting the most vulnerable groups to mitigate the impacts of higher cost of living, exacerbated by largely external shocks, as well as continuing Malaysia’s goal to become a developed nation with much-needed investment in public transport infrastructure and in industry and trade. Nonetheless, the government should be mindful of the ongoing budget deficit to ensure a manageable level of risk, and it is expected that the new government post-GE15 will address this issue in the forthcoming 24 February 2023 Budget. Key priorities for the government going forward given the uncertain and challenging environment will include rebuilding investor confidence and strengthening the fiscal position through holistic tax reforms.
The ringgit continued in its three-year pattern of mild and persistent depreciation, reaching a post-2020 lowest level in November 2022. Median daily NEER for Q4 2022 was at 95.6 (with 1 January 2020 as the base rate of 100), a 1.18% decrease quarter-on-quarter and a 1.65% decrease year-on-year. The ringgit’s depreciation against the US dollar comes as the Singapore dollar and the Chinese yuan have retained dollar exchange rates roughly at par with their January 2020 levels, although it should be noted that the depreciation of the Thai baht and Japanese yen have both been more significant than that of the ringgit. While this depreciation does spell good things for Malaysian exporters in improving the balance of payments, for products where Malaysia relies on imported goods, this will only push the price up for Malaysian consumers. More recently, however, particularly in January 2023, the ringgit has been strengthening.
Overall, Q4 2022 shows a mixed picture for the Malaysian economy, government, and society. Consumer sentiments are improving, while business sentiments are weakening; inflation is high but reducing; the ringgit is depreciating but not rapidly. Growth is projected to be moderately lower and in line with other countries in the region, for 2023. However, as the last two years has shown, we are living in a highly difficult and unpredictable environment; there are many unknown factors which economists and politicians must contend with as they prepare for the months ahead.
Malaysian Institute of Economic Research
10 February 2023
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