Recent QET

Recent QET

2022Q4 & 2023 Outlook: Malaysia: A Reset, A Slowdown

9 January 2023

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  • 2022 has been a year of plentiful turbulence, and the ride has been very bumpy for Governments, businesses, households and central banks navigating through the threats.

  • As the world economy already hurdled by the supply chain disruptions induced inflation and cost pressures, tight labour market conditions, revived consumer demand from excessive fiscal stimulus and ultra-loose monetary policy, Russia’s aggression in Ukraine has added sharply rising commodity, energy, food, and industrial material prices, pushing the world economy to the risk of stagflation – high inflation and low economic growth.

  • With the impact of the COVID-19 pandemic still lingering, the prolonged military conflict in Ukraine is dragging down global growth and putting additional upward pressures on prices, and interest rates, and a much more aggressive monetary stance by the Federal Reserve (Fed) and other global central banks.

  • The global economic trend growth rate is weakening rapidly. The International Monetary Fund (IMF), World Bank, OECD and central banks have trimmed economic growth estimates to align with high inflation, higher interest rates and slowing economic activity. Though the world’s two largest economies (the US and China) have exceeded growth expectations to grow by 1.9% and 3.9% in the third quarter of 2022, but data has clearly indicated continued slowdown.



  • Risks to the global economy remained two sided. While there are threats and challenges, there are some tailwinds and silver lining from still strong job market, and the inflation has come off from the recent peak, thanks to cooling of commodity and energy prices.

  • Global economy and potential recession. Global recession risk mounts. The IMF has warned that one-third of the world economy is in recession in 2023. Our base case expects global economy to grow by around 2.5%-2.7% in 2023, seemingly recessionary feel like as inflation and the lagged impact of higher interest rates headwinds as well as tighter financial conditions slow down domestic spending and business activities.

  • Inflation pressures stay longer, albeit lower. What has started as the supply disruptions and cost driven inflation pressures, have broadened to other goods and services. The improvement in labour market conditions and higher wage growth have reinforced supply disruptions and costs driven inflation, compelling the central banks to press the brake even harder.

  • Global interest rates unlikely pivoting back towards cut in 2023. Almost all global central banks have hiked interest rates faster and higher in recent months of 2022, hardening their resolve to bring down inflation as well as anchor inflation expectations.




  • The Malaysian economy has staged a strong recovery to grow by an average economic growth of 9.3% yoy in the first nine months of 2022, partly attributable to low-base effect and is estimated to end the year at 8.5% (3.1% in 2021). The engines of growth were buoyant domestic demand and sustained expansion of exports.

    Robust consumer spending (+12.7% in Jan-Sep 2022), largely pent-up demand induced by cash/financial assistance stimulus (a total of RM145 billion EPF withdrawals; Bantuan Keluarga Malaysia (BKM); loan repayment assistance). Aided by a favourable low-base effect, private investment also strengthened from 3.3% in 1H 2022 to 13.2% in 3Q 2022 amid increased business costs and the shortage of workers.

    Buoyant exports continued for two consecutive years (26.1% in 2021; 27.2% in Jan-Nov 2022), thanks to both volume and price effects as reflected in higher demand of electronics and electrical products, chemicals, metal products, crude petroleum and liquefied natural gas.

    Bank Negara Malaysia has embarked on interest rate normalization on a measured pace as it balances between containing inflation risk and ensuring firmed economic recovery. The benchmark overnight policy rate (OPR) was hiked by a cumulative 100 basis points in four successive times to 2.75% at end-December 2022.



  • The Malaysian economy is likely to see weaker economic growth estimated 4.1% in 2023 compared to estimated 8.5% in 2022, reflecting largely the normalization of technical high base effects. Moderating exports, the normalization of domestic demand, continued dampening impact of inflation and higher cost of living, and the lagged effects of interest rate increases will weigh on domestic economic growth.

    Certainly, the interplay of weakening external environment, new government’s macro-narratives, domestic inflation, and interest rate will ultimately shape Malaysia’s economic growth outlook for 2023.

  • What to watch in 2023? (1) When will the Fed pivot on its interest rate hikes? What could be a turning point? While the Fed will shift to smaller magnitude of rate hikes (2023F: 5.00%-5.25% Fed funds rate), the higher interest rate level will stay longer throughout 2023 until the inflation risk is anchored and come down to 3%-4%; (2) Geopolitical concerns surrounding the Russian-Ukraine conflict remain; will it come to an end or develop into a new round deepening rift?; (3) Geopolitical tensions between the US and China is likely to get more intense as both Democrat and Republican lawmakers will continue to up the ante in domestic policies to counteract against China in the run up to the US Presidential Elections in 2024.


What could offer positive surprises to Malaysia’s economic growth?

  • The Unity Government has to ensure a stable and good governance political system and economic ecosystem, the key precondition to rebuild businesses and investors’ confidence.

  • In broad sense, both Pakatan Harapan (PH)’s and Barisan Nasional (BN)’s manifesto address and provide structural solutions for the rakyat’s concerns about immediate economic issues (cost of living, income, jobs), education, healthcare and climate change-related impact.

    Governance and institutional reforms also featured prominently, underscoring the importance of reforming political and public institutions to ensure effective governance, transparency and accountability of the Government administration.

    Both manifestos have some notable common offerings though we believe that some initiatives can be implemented immediately, in particular concerning people-centric measures to ease the impact of inflation and higher cost of living on B40 households.

    We view positively the laid-out pledges to ensure good governance practices and to undertake institutional reforms. With a convincing two-thirds majority, we hope that the Unity Government can front-load as well as prioritize the implementation of governance and institutional reforms. Political reforms do not incur any fiscal costs compared to economic and social reforms.

    Faced with public and investors’ lack of confidence and distrust, effective governance and credible institutional reforms are deemed critical to improving state institutional capacity as the precondition to build capable, transparent, efficient and trust as well as confidence in government and public institutions.

    As institutions affect the economy through the creation of an environment necessary for economic growth, prosperity and development, the effectiveness of political and economic institutional reforms would not only have positive impact on economic growth but also increase the level of investment because it gives more confidence to investors and businessmen and the business environment is more competitive for economic potential.


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