2024Q3: The Malaysian Economy is Fired on Twin Cylinders

8 October 2024

A. WORLD ECONOMIC OUTLOOK UPDATE

GLOBAL ECONOMY STILL STEADYING, ALBEIT AT A SLOW PACE

Slowing global growth likely to continue. Major leading indicators are pointing to continued global expansion, albeit at a slow pace compared to past decades.
Continued growth divergence in advanced economies. The US economy is cooling and will continue to cruise along amid clear signs of slowing in the labour market. In the near term, the potential economic outcomes driven by the policy decisions of the next President, from tax cuts and spending adjustments to tariffs and trade relations will have far-reaching impacts. We expect the eurozone’s economic growth to recover gradually in Q4 2024 and 2025, supported by strengthening exports, recovering private consumption and investments. For Japan, subdued economic growth is expected to pick up in 2025 as sticky inflation pressures subside and export performance improves. China’s economic growth still weighed down by the beleaguered property sector amid the bazooka stimulus to prop up its economy.
Major risks threatening global economy. The following risks taken together and mutually reinforcing each other: rising heat of geopolitical tensions, trade fragmentation, the US and China economy slowdown, financial distress, renewed inflation pressures and climate-related disasters. The US Presidential Elections outcome in November could cast policy uncertainty in global trade and financial markets.

B. MALAYSIA ECONOMIC OUTLOOK UPDATE

THE MALAYSIAN ECONOMY IS FIRED ON TWIN CYLINDERS

The Malaysian economy has performed above expectations. The Q2 2024 GDP growth of 5.9% yoy (4.2% in Q1) indicates optimism for the economy, supported by resilient consumer spending, sustained high business investments, and improved exports.
Our baseline scenario is still positive in the near to medium-term. Consumer spending continues to chalk up higher growth of 6.0% in Q2 (4.7% in Q1), due to the Hari Raya Aidilfitri celebration spending, regular payment of cash assistance, and the withdrawals of RM9.6 billion from the EPF Flexible Account (Account 3) by 3.6 million or 27.5% of total 13.1 million EPF members as of 12 August (RM8.9 billion as of 19 July and RM7.0 billion as of 10 June.
Stable labour market conditions will support consumer spending amid rising cost of living and price pressures. The unemployment rate is holding steady at 3.3% at Q2 2024, and the labour force participation rate hit a record high of 70.5% in Q2 2024. However, nominal wage growth continued to grow marginally in the manufacturing sector (0.4% in Q2 vs. 0.7% in Q1) and services sector (1.8% in Q2 and 1.6% in Q1). After adjusting for inflation, real wages were negative for both sectors.
We expect Bank Negara Malaysia to keep its overnight policy rate steady at 3.00% in 2024 and in 1H 2025, keeping a close watch on any signs of inflation risk, which could come from the public sector employees’ salary revision and higher minimum wage.

2025 BUDGET TO DRIVE GROWTH WITH FISCAL STABILITY

Against a backdrop of continuing moderate global growth in 2025 amid a multi-layer of geopolitical conflicts and policy risks, we expect the 2025 National Budget tabling on 18 October 2024, will be a blend of sustaining economic growth with fiscal stability, investment orientation, and supporting long-term sustainable development.
We expect the Government to aim a lower fiscal deficit to GDP ratio of 3.8% for 2025 from estimated 4.3% in 2024 on better federal revenue outturn and continued restraint in operating expenditure.
We expect the Ministry of Finance to up its 2024’s GDP growth estimate to 5.0%-5.5% from 4.0%-5.0% currently, and introduce 5.0%-6.0% for 2025. We are looking at 5.4% in 2024 and 5.0% in 2025.
We expect the 2025 Budget to lay out measures and initiatives in areas of tackling cost of living and business costs pressures, supporting green economy, wage-enhancement and skills development, fostering investment through reducing bureaucracy and strategic investment funds, and strategic budgetary allocations for key sectors (affordable public housing, public transport and infrastructure, ports, roads, healthcare, education and training, and digital infrastructure).