ECONOMICS COMMENTARY — Nov 27, 2023
Malaysian GDP growth improves in third quarter of 2023
By Rajiv Biswas
Malaysian GDP growth improved to a pace of 3.3% year-over-year (y/y) in the third quarter of 2023, compared with growth of 2.9% y/y in the second quarter of 2023. When measured on a quarter-on-quarter (q/q) basis, the pace of growth strengthened to 2.6% q/q, compared with 1.5% q/q in the second quarter of 2023 and just 0.9% q/q in the first quarter of 2023.
Merchandise exports have been weak during 2023, with exports of goods and services declining by 12% y/y in the third quarter of 2023. However, an important positive factor during 2023 has been the continued gradual recovery of international tourism visits.
Malaysian economy shows resilient growth in third quarter of 2023
The pace of expansion of the Malaysian economy measured on a year-on-year basis has moderated in 2023 due to a number of headwinds, including the impact of high base year effects and slowing merchandise export growth.
However, measured on a quarter-on-quarter basis, the Malaysian economy has shown improving growth momentum, with GDP growth rising by 2.6% q/q in the third quarter of 2023, after growing by 1.5% q/q in the second quarter of 2023 and by 0.9% q/q in the first quarter of 2023. Growth momentum has shown a significant turnaround compared with contraction of 1.7% q/q in the fourth quarter of 2022.
The Malaysian services sector continued to show firm growth of 5.0% y/y in the third quarter of 2023, slightly up from the 4.7% y/y pace recorded in the second quarter of 2023. The pace of expansion in the construction sector also remained strong, growing by 7.2% y/y in the third quarter compared with 6.2% y/y in the second quarter of 2023. That said, growth in the manufacturing sector contracted marginally, down 0.1% y/y, after showing only a marginal increase of 0.1% y/y in the second quarter of 2023.
The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers' Index (PMI) was unchanged at 46.8 in October, still indicating weak operating conditions for the manufacturing sector.
Respondents largely attributed the latest easing in production to weak demand conditions both domestically and internationally. This anecdotal evidence was consistent with data covering total new orders and new export business, both of which saw a sustained slowdown in October. With new orders softening, manufacturers were able to transfer spare resources to work on outstanding business. Backlogs of work subsequently fell sharply over the month.
During 2022, an important positive factor for the Malaysian manufacturing sector was the strength of manufacturing exports. Overall, Malaysian merchandise exports performed strongly during 2022, with exports rising by 25% y/y. Exports of manufactured goods rose by 22% y/y during 2022, boosted by exports of electrical and electronic products, which rose by 30%. Rising world commodity prices also boosted commodities exports, with mining exports up by 68% y/y due to strong exports of oil and gas, while agricultural exports rose by 23%.
However, in 2023, the pace of export growth for goods has weakened, reflecting base year effects as well as the economic slowdown in key markets, notably the EU and mainland China. Goods exports in the first ten months of 2023 fell by 8% y/y. In October 2023, goods exports showed a modest positive increase of 1.5% y/y. The improvement was helped by a 3.3% y/y rise in agricultural goods exports and a 6.6% increase in exports of machinery, equipment and parts. Exports of mining goods fell by 21.9% y/y, however, due to lower exports of LNG and crude petroleum.
As mainland China is Malaysia's largest export market, accounting for 15.5% of total exports, the weak momentum of the rebound in mainland China's economy during 2023 has also been a significant headwind to Malaysia's exports. Malaysian merchandise exports to mainland China fell by 9.5% y/y in the first ten months of 2023. Exports to mainland China for the month of October remained weak, down by 7.0% y/y.
A positive factor for services exports is that international tourism has been strengthening, as tourist arrivals from major tourism markets in ASEAN, Middle East and Europe continue to recover, while Chinese tourist arrivals gradually improve. Tourism Malaysia is targeting 16.1 million international visitor arrivals for 2023, a 60% increase compared with the estimated 10.1 million international visitor arrivals in 2022. This compares with the pre-pandemic level of 26.1 million international visitor arrivals in 2019. Total international visitor arrivals were estimated to have reached 14.4 million persons during the first nine months of 2023. In 2019, total domestic and international tourism was estimated to have accounted for around 16% of gross value added in Malaysia's total GDP.
Inflation pressures have been gradually easing
According to S&P Global Malaysia PMI survey data, the rate of input cost inflation increased in October, reaching the highest since November 2022. However, the latest increase was still softer than the series average and much weaker than seen over much of the past three years. According to respondents, inflation reflected both ringgit weakness against the USD and higher costs for raw materials in international markets. Output charges rose for the third month running as firms passed higher input costs on to their customers.
CPI inflation pressures have been gradually moderating during 2023, easing to a pace of 1.9% y/y in September 2023 compared with 2.0% y/y in August and significantly lower than the reading a year ago, which was 4.5% y/y in September 2022.
During 2022, Malaysia's central bank, Bank Negara Malaysia (BNM), had reduced the degree of monetary accommodation in a series of tightening steps. The most recent monetary policy tightening was on 3rd May 2023, when the Monetary Policy Committee (MPC) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.0%.
The MPC expects that headline inflation will average between 2.5% - 3.0% for 2023. BNM expects that headline inflation will remain modest in 2024. However, an important uncertainty for the inflation outlook in 2024 will be the Malaysian government's intention to review price controls and subsidies in 2024. Existing price controls and fuel subsidies have played a significant role during 2022-23 in partly containing the extent of upward pressures to inflation.
Moderating global electronics demand adds to headwinds
The electrical and electronics (E&E) sector has been an important driver of Malaysia's manufacturing exports. Exports of E&E products, which accounted for 38% of merchandise exports, rose by 30% y/y in 2022. This rapid growth was driven by robust global demand for semiconductors, reflecting technological trends such as 5G rollout, cloud computing, and the Internet of Things. Exports of integrated circuits grew by 33% y/y in 2022, while exports of parts for integrated circuits rose by 120% y/y. The combined exports of integrated circuits and parts accounted for 58% of Malaysia's total exports of E&E products in 2022.
The global electronics manufacturing industry has slowed since mid-2022 due to the soft pace of economic growth in the US, EU and China. Consequently, Malaysian exports of electrical and electronic products have shown some weakness during 2023. However, the extent of the decline has moderated in recent months, with exports of electrical and electronic products down by only 2.3% y/y in October 2023.
Recent S&P Global survey data continues to indicate that the global electronics manufacturing industry is facing headwinds from weak economic conditions in key markets. The headline seasonally adjusted S&P Global Electronics PMI was at 46.9 in October, continuing to show contractionary conditions across the global electronics manufacturing sector as key consumer markets for electronics, notably mainland China and the EU, have remained weak.
Economic outlook
The Malaysian economy rebounded strongly during 2022, with economic growth momentum boosted by the easing of COVID-19 restrictive measures as well as buoyant exports of electrical and electronic products, palm oil products as well as oil and gas exports.
In 2022, higher world oil and gas prices as a result of the Russia-Ukraine war boosted Malaysian energy exports and contributed to higher fiscal revenues. Malaysia also benefited from higher average palm oil prices, due to disruptions to world edible oil markets, including Ukrainian exports of sunflower oil.
During 2023, growth momentum has moderated when measured on a year-on-year basis, due to base year effects and the significant decline of merchandise exports. However, the quarter-on-quarter growth rate has strengthened significantly in the second and third quarters of 2023.
The reopening of international borders across the Asia-Pacific region, including in mainland China, has helped the continued gradual recovery of the international tourism industry, which was an important part of the Malaysian economy prior to the pandemic. This is helping to mitigate the impact of weaker merchandise exports. Domestic demand has remained resilient during 2023, helped by the improvement in labour market conditions. Easing of restrictions on entry of migrant labour are also gradually helping to support industry sectors that are reliant on foreign workers.
There are a number of downside risks to growth outlook for 2024, particularly due to continued weak economic conditions in the EU and the sluggish pace of recovery in mainland China. Malaysia's export sector is vulnerable to the risk of protracted weak economic growth momentum in 2024 in the US and EU, which together account for around one-fifth of total exports, as well as downside risks to the pace of mainland China's recovery.
Despite the slowdown in global electronics orders in 2023, the medium-term economic prospects for Malaysia's electronics industry are favourable. The outlook for electronics demand is underpinned by major technological developments, including 5G rollout over the next five years, which will drive demand for 5G mobile phones.
Demand for industrial electronics is also expected to grow rapidly over the medium term, helped by Industry 4.0, as industrial automation and the Internet of Things boosts rapidly growth in demand for industrial electronics.
Malaysia's competitiveness as a global electronics hub has been highlighted by the decision of a number of electronics multinationals to invest in large-scale new projects. Intel is investing USD 7 billion in a new semiconductors packaging plant in Penang, which is estimated to be completed by 2024 and create thousands of new jobs in Malaysia. Infineon Technologies is constructing a new state-of-the-art wafer fab module in Kulim, with around Ringgit 8 billion of investment. The new module, which is expected to be completed in 2024, will add significant manufacturing capacity in power semiconductors.
Malaysia set to become a 1 trillion dollar economy by 2035
Overall, the medium to long-term growth outlook for Malaysia remains favourable, with total nominal GDP measured in USD terms forecast to rise from around USD 400 billion in 2022 to USD 710 billion by 2030 and USD 1 trillion by 2035.
Meanwhile per capita GDP is projected to rise from USD 12,000 in 2022 to USD 19,300 by 2030 and USD 26,400 by 2035, which will help to drive the growth of the domestic consumer market and also propel Malaysia into the ranks of the world's high-income economies as measured by GDP per person.
Access the Malaysia Manufacturing PMI press releases here.
Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence
Purchasing Managers' Index™ (PMI®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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