Data from the department of statistics Malaysia (DoSM) this week reveals the country’s industrial production index (IPI) had fallen in June while the expected recovery in China’s economy has failed to materialise.
Put together, these and other factors have prompted a slew of research houses to revise downwards their forecast for second quarter (Q2 2023) gross domestic product (GDP). In an export-driven economy such as Malaysia, industrial production serves as a key indicator of the country’s economic performance.
On Tuesday, DoSM reported the IPI declined 2.2% year-on-year (y-o-y) in June from growth of 4.8% just the previous month, attributing it to a contraction in the manufacturing and mining sectors. The data also showed the IPI moderated to 1.3% in H1 2023 from 5.4% in the same period last year.
In a note issued the same day, MIDF said the pace of the IPI’s decline was sharper than the market forecast while RHB Research lamented the “lacklustre performance” in the manufacturing and services sectors.
UOB Global Economics and Markets Research is projecting Q2 2023 GDP growth to be 3.2% y-o-y from 5.6% in the first quarter of 2023. It cited economic indicators in April to June pointing to a further slowdown in the country’s real GDP growth.
Maybank Investment Bank Bhd estimates Q2 GDP growth at 3%, alongside a current full-year real GDP growth forecast remaining at 4.5%. Meanwhile, Hong Leong Investment Bank Research expects Q2 GDP to record a slower growth of 2.9% y-o-y.
Economists Yeah Kim Leng and Benedict Weerasena point out that at a time of global trade volatility, fluctuations in manufacturing are to be expected.
Weerasena, the research director at Bait al-Amanah, said forecasts needed to be revised downwards when external conditions are weaker than expected.
“This is due to the diminishing low base effect in addition to a weaker external demand, as a result of a global slowdown in economic activity and global monetary policy tightening,” he told FMT Business.
Yeah, a professor of economics at Sunway University Business School, said such declines “were not unusual” in the face of a global slowdown.
“There seems to be a delayed impact on industrial production given we are expecting industrial output to slow down in the second half on a gradual basis,” he said.
He said the Chinese economy had started to weaken, and there were signs the same would be happening in the UK and Europe. “This will result in a weakening of the demand for Malaysian goods.”
He said a major factor contributing to the weakening economy was the monetary tightening policy of the US to tackle the inflation threat. “The current high interest rates have a softening effect on demand.”
Moderation in export growth
Monash University Malaysia professor of economics Niaz Asadullah said major international agencies had also downgraded their forecasts for the global economy, implying a slower growth in imports.
He noted that the World Trade Organization (WTO) sees an overall growth in trade of 1.7% in 2023, down from 2.7% in 2022.
Niaz said the demand for electrical and electronic (E&E) products – Malaysia’s main merchandise export – had also declined in the EU, China and the US.
Malaysia’s major regional trade partners are also experiencing slower growth. “GDP growth in Asean, which accounts for a third of Malaysia’s exports, is expected to moderate to 4.6% this year from 5.6% in 2022,” he told FMT Business.
On the bright side, the country’s services sector chalked up strong growth in Q1 2023. The country also expects more international tourist arrivals in H2 2023.
“Growth in the services sector will be critical to offset the slowdown in manufacturing,” Niaz said.
Center for Market Education CEO Carmelo Ferlito said the manufacturing sector was just in “rebalancing” mode after a strong rebound post Covid-19.
“It is now back to its normal trend, and that is to be expected,” he said, adding the economic growth rate this year should be about 4%.
Too early to be pessimistic
Moving into the second half of the year, Yeah believes it is still too early to call for a downward GDP revision, given that the recession risk in the US has receded.
“The expectation here is that with easing inflation, the US Federal Reserve may be at the end of the hiking cycle.
“The expectations of a downturn in the US have been pushed forward to next year, and given this latest development, the slowdown may not be as severe as initially expected,” he said.
He is hopeful domestic demand, especially investment, remains resilient when combined with sustained consumption and government spending.
“This may be able to offset the weaker global demand, enabling Malaysia to achieve the 4%-5% growth expected for this year,” he said.
Yeah also expects the fiscal stimulus and the monetary easing in China to provide some lift in the second half, adding that an improvement in Chinese demand will help provide support to Malaysia’s exports.
Weerasena said Malaysia’s economic momentum is projected to moderate during the latter half of the year. “However, this does not spell danger for the Malaysian economy,” he said.
He explained that this is due to the upside risks such as resilient domestic demand, a healthier labour market, and stronger-than-expected tourism activity, supported by the country’s intact economic fundamentals.
“That being said, ongoing structural reforms and political stability post the state elections are critical to ensure Malaysia continues on the pathway of sustainable economic growth,” he said.