The market research outfit estimated that the growth in real household spending would slow down from 11.8% in 2022 to 5% in 2023, marking a return to “normal, pre-pandemic growth rates”.

However, it said in its 2023 consumer outlook for Malaysia, inflationary pressure would remain elevated despite the slower rate of price changes. It expects an average of 3.1% headline inflation in 2023.

Fitch Solutions said government intervention through subsidies and price controls had largely helped to ease inflation.

However, it said, it would not be spread evenly across different consumer spending segments. “(Inflation in) areas such as rent, services, red meat and poultry are likely to remain sticky and high over the course of the year,” it added.

Fitch Solutions said prices could also experience some volatility as subsidies and price controls are lifted or narrowed in scope this year.

It said inflationary pressures are also outpacing wage growth as evident in the withdrawal of household and business savings since April 2022.

“Although the depletion of savings is cause for concern, it may mitigate the surge in aggregate demand that occurred during the recovery period last year. The aggregate demand was largely driven by private consumption, of which higher interest rates and the lifting of price controls will work to reduce this year,” it said.

Room to tighten monetary policy

The ringgit has continued to face downward pressure due to a hawkish US Federal Reserve.

Fitch Solutions believes that Bank Negara Malaysia (BNM) should follow suit in raising interest rates to safeguard the ringgit’s stability, pointing out that other positive indicators of a recovery provided room for further tightening.

However, at its last estimate, BNM put household debt at 84.5% of GDP, one of the highest in the region. As interest rates begin to rise, so too will the cost of debt servicing, it pointed out.

This is likely to have an impact on consumer spending patterns, as more income is earmarked for personal debt repayment.

Continued growth, at a slower rate

As the demand for private consumption cools, growth rates will moderate from 2022 levels, but remain steady.

Fitch Solutions predicts the Malaysian economy will grow 4.0% y-o-y in 2023, slowing from 8.4% in 2022. Their growth projections for 2023 are in line with that of the World Bank.

This is attributed to slowing but positive growth in retail sales, reaching a rate of 22.8% y-o-y in November 2022, according to the latest data available.

The protection of Malaysian consumers from the real, inflated market prices is likely to ensure demand does not fall drastically.

The recovery of the hospitality industry is identified as a key mitigating factor, especially in lowering unemployment rates.

Fitch Solutions noted that a strong labour market acted as a backbone for last year’s growth, and must be the economy’s bulwark again this year.