Malaysia’s economy is projected to moderate sharply to 3.5% in quarter two 2023 (quarter one 2023 future: 5.1%) due to a waning low base effect and as the economy returns to normalcy.
“We maintain overall gross domestic product growth forecast for 2023 at 4.7% (2022: 8.7%) as we expect domestic demand to remain resilient, backed by sizeable fiscal policy support and positive optimism over China’s Reopening,” said Kenanga, adding that downside risk to growth, from the domestic side, will be limited due to the lower political risk premium and the expected increase in investments.
This is also due to a clear policy direction by the unity government along with its revised Budget 2023, which saw the government continue to lean towards expansionary fiscal policy to support growth. Growth will also be supported by robust domestic demand, amid sustained private spending due to lower unemployment rate which is expected to average at 3.5% (2022: 3.8%), and supportive policy measures, including the continuation of subsidies and cash transfer programmes for the B40 group.
Headline consumer price index is expected to decrease gradually to 3.0% – 3.5% on average in quarter two 2023 due to government’s efforts to reduce cost of living, a stronger ringgit and falling commodity prices. Potential risks of increased tourism and geopolitical uncertainty could push prices upwards. However, inflation may continue to trend lower and average around 2.5% in 2023.
Due to a decline in inflationary pressures and the continued global economic slowdown, Bank Negara Malaysia is anticipated to maintain the overnight policy rate at its current level of 2.75% for the remainder of the year.
This is due to the downward trend of both headline and core inflation, falling below 4.0%. Looking ahead, it is likely that Bank Negara Malaysia may maintain its current policy stance until the end of 2023, in line with its commitment to ensure price stability and sustainable economic growth.
Meanwhile, the Fed’s recent transition to a more dovish monetary policy stance may shift the ringgit’s bearish narrative moving forward, potentially leading to the local note trading below the 4.40 level by the end of quarter two 2023. While Malaysia’s robust economic fundamentals should also support the ringgit’s performance, external factors may still influence its trajectory.
Despite this, Kenanga Research is still maintaining their earlier projections of 4.35 and 4.11 for quarter two 2023 and end-2023, respectively. Domestic bonds are expected to remain less sensitive to the volatility among developed market sovereigns, whilst decent domestic demand and improving foreign demand, as investors seek portfolio diversification outside of the US and Europe mainly towards the emerging markets, are expected to lower Malaysia government bond yields.
“We expect the 10Y Malaysia government bond yield to reach 3.65% by end-2023,” said Kenanga Research.
Risk to Malaysia’s growth outlook remains, chiefly from external sources such as the ongoing concerns about a recession in the US amid further Fed rate hikes and the impact of recent global banking instability, as well as escalation over geopolitical tensions. Nonetheless, China’s economic reopening is expected to support global growth.
Various other factors on a macro scale have elevated headwinds to the global growth outlook, among them are such as the tighter financial conditions, due to monetary policy tightening by major central banks to fight inflation, the ongoing Russia-Ukraine crisis, and the emergence of global banking fears brought by the collapse of Silicon Valley Bank.
Yet data posted by Kenanga Research in the recent Malaysia Quarter Two 2023 Economic Outlook Report projects a positive stance. Take for example inflation in Q2 2023, where price pressures could be further alleviated by slowing global economic activity, the easing of supply bottlenecks, declining commodity prices and the persistence of global financial instability.
“After experiencing a series of global shocks and inflationary episodes, such as severe global supply chain disruptions during the COVID-19 pandemic and an energy crisis during the Russia-Ukraine war, we believe that the global inflation has now peaked,” said Kenanga Research today (March 29).
With the boost to economic activity from the reopening already fading and supply bottlenecks mostly resolved, price pressure is expected to ease in the coming months. This, combined with lower energy and commodity prices, should help to further unwind inflationary pressure.
The US Fed’s tightening cycle is nearly over, probably raising rates once more in May before cutting rates by 50 basis points in quarter four of 2023, while the Bank of England seems to have finished hiking and could follow with rate cuts by year-end.
US monetary policy faces greater complexity due to the recent banking crisis and despite the widely expected 25 basis points rate hike by the Fed at its most recent meeting.
“While Fed Chairman Jerome Powell tried to calm markets, we think it is still likely that the recent bank collapses will trigger a credit crunch, leading to a harder landing for the US economy,” said Kenanga Research.
Meanwhile, US consumer price index slowed in February (6.0% year-on-year; Jan: 6.4%) and industry data indicates the potential for rental and housing prices to decrease in the second half of 2023, which could result in even lower inflation going forward.
“As such, we reckon that the Fed’s tightening cycle is near its end, and that it will raise rates just one more time in May by 25 basis points to a terminal rate of 5.25%,” the research house added.
The European Central Bank prioritises fighting inflation, is expected to continue raising rates and looks unlikely to cut rates this year. The Bank of Japan may adjust its monetary policy soon under new governor Kazuo Ueda, while the People’s Bank of China is expected to remain dovish. The 10Y US Treasury yield may be volatile in quarter two 2023 due to the regional banking crisis and uncertainty over the Fed’s policy.
“For end-2023, we expect the 10Y US Treasury yield to settle at 3.10%,” it said..
Crude oil prices may endure a period of volatility amid the fears of a global economic slowdown due to financial tightening and the prolonged Russia-Ukraine crisis.
However, China’s reopening and organisation of the petroleum exporting countries+ output restraint would likely support oil prices. Therefore, Kenanga Research has maintained the average Brent crude oil price forecast at USD80.0/barrel for 2023 (2022: USD99.0/barrel). Meanwhile, the US Energy Information Administration (EIA) projects an average of USD84.0/barrel and USD83.00/barrel for quarter two 2023 and 2023, respectively.
“Nevertheless, we expect the price to remain supported by China’s reopening with Chinese travel to drive consumption going forward. This will be further supported by organization of the petroleum exporting countries+ output restraint as it remains cautious over global consumption and economic outlook,” Kenanga Research said.
