Pikom signals caution in economic outlook for Malaysia in 2023

Pikom signals caution in economic outlook for Malaysia in 2023
  • BNM expects sustained domestic demand & spending to continue anchoring growth
  • Pikom sees need to be cautious over strong and sustained headwinds in months ahead

Pikom believes the increase in power tariffs, while not affecting consumers directly, could result in higher inflation when costs are eventually passed down the line.

In our debut, The Sharp End By Pikom column in collaboration with Digital News Asia, Pikom, the National ICT Association of Malaysia takes note of the 10 Feb Bank Negara Malaysia (BNM) statement where the central bank has allayed concerns of a recession in 2023 after a year (2022) in which Malaysia’s gross domestic product (GDP) grew by a two-decade high 8.7% – exceeding most expectations and projections by 2.0% – 3.0% points.

Although GDP growth moderated to 7.0% in Q4 2022 (from 14.2% in Q3 2022), BNM highlighted that this was nevertheless above long-term average growth of 5.1%. The central bank attributed sustained growth to private sector activity in consumption and investment.

In particular, BNM cited the resilient export performance of electrical and electronics (E&E) products, higher returns from tourism activities, and sustained performance of the Services and Manufacturing sectors as the drivers of growth.

Meanwhile, Malaysia’s inflation rate moderated to 3.9% in Q4 2022 from a peak of 4.5% in the previous quarter, averaging 3.3% for the year. This was mainly due to the lapse in the base effect of rising electricity costs as well as moderating global commodity process leading to lower inflation for some consumer price index (CPI) items such as fuel and key staple food items.

As a response to easing inflation albeit at elevated levels, BNM opted against raising the Overnight Policy Rate (OPR) in its recent review.

Looking ahead, BNM had in November 2022 projected that the Malaysian economy would grow by a slower 4.0% – 5.0% in 2023 in the face of continuing headwinds such as the disruption to global supply chains, uncertain financial situation and geopolitical conflicts.

In media interviews, BNM Governor Nor Shamsiah Yunus said Malaysia is unlikely to go into a recession this year, “as sustained domestic demand and spending are set to continue anchoring growth.”

PIKOM’s Assessment for 2023

The Malaysian economy is expected to continue its recovery from the impact of the Covid-19 pandemic in 2023 with the Government focusing on measures and investments in key sectors such as Tourism, Manufacturing and Services to support the economy.

Notwithstanding this, the recovery will be affected by other external factors including the state of the global economy, risk of escalation in the current Russia-Ukraine conflict and volatility of domestic politics.

Other trends and factors that may impact Malaysia’s economy include:

  • Despite a relatively high Q4 2022 growth rate, Malaysia is likely to face a downtrend in most key economic indicators from mid-2023 onwards until Q1 2024.
  • There could be spillover effects from other economies hit by recession.
  • The increase in power tariffs, while not affecting consumers directly, could result in higher inflation when costs are eventually passed down the line.
  • The OPR could be increased in the next few months in response to both local and global inflationary pressure.
  • The twin impact of lower economic growth and higher inflation could dampen market sentiment and affect cost of living for Malaysians.
  • The global economy is expected to be influenced by ongoing trends related to trade and globalisation, including the rise of protectionism, disruptions in supply chains and the increasing interdependency of economies.
  • The slowdown of China’s economy impacted by its extended zero-Covid policy would have a bearing on the Malaysian economy although its recent reopening is a positive development.
  • The reopening of China’s borders can ease pressure on a global supply chain long constrained by the pandemic.
  • Foreign investments may lean in favour of nations with attractive tourist destinations and top educational institutions instead of Malaysia.
  • Talent layoffs at global tech firms, although not expected to take place in Malaysia, could raise concerns of retrenchments and may result in suppressed spending and lower investments in an FDI-dependent Malaysia.
  • Advancements in tech will continue to play a major role in shaping the global economy, with the adoption of new technologies such as automation, artificial intelligence (AI) and data analytics, the metaverse, and virtual / augmented / extended reality expected to have a significant impact on economic activities and productivity.
  • Environmental, Social and Governance (ESG) sustainability and climate change are likely to become increasingly important factors in shaping the global economy as governments and businesses increasingly focus on reducing carbon emissions and promoting sustainable economic activity.
  • Climate change concerns may also affect businesses reliant on coal, oil and gas and other natural resources as investors and consumers push back against ‘environment-damaging’ activities.

Based on PIKOM’s analysis and projections, the Malaysian economy is definitely not out of the woods. If anything, we need to be cautious over strong and sustained headwinds in the months ahead.

As the saying goes: ‘When the US sneezes, we catch a cold!’ As a nation with a small population and economy, we should hope this does not turn out to be another pandemic!

Woon Tai Hai is Pikom Research Chair