Malaysia's economic and financial developments Q2 2023: Economy expanded moderately

Headline inflation during the quarter also continued to moderate, as recorded in both non-core inflation and core inflation.

Malaysia's economy expanded moderately in the second quarter of 2023 at 2.9% (Q1 2023: 5.6%).

According to Bank Negara Malaysia (BNM), this growth was weighed mainly by slower external demand. Domestic demand remained the key driver of growth, supported by private consumption and investment. Further growth in employment and wages also, in turn, drove household spending.

Meanwhile, investment activity was underpinned by capacity expansion, progress of multi-year projects, and higher fixed asset spending by the government. At the same time, BNM observed continued recovery in inbound tourism, which partially offset the slower goods export growth.

Growth during the quarter was also affected by the high base effect in the second quarter of 2022 when the economy experienced strong growth from reopening effects and policy measures. On the supply side, the services and construction sectors contributed to the growth. Meanwhile, production in the agriculture as well as mining sectors was affected by hot weather and plant maintenance.

On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.5%. For better comparison, the first quarter of 2023 noted 0.9%.

Lastly, headline inflation during the quarter continued to moderate to 2.8% (Q1 2023: 3.6%). The moderation was recorded in both non-core inflation and core inflation.

For non-core inflation, the decline was attributed to fresh food and fuel.

On the other hand, while core inflation declined, it remained elevated relative to its long-term average (2011-2019 average: 2.0%) — this moderation (2Q 2023: 3.4%; 1Q 2023: 3.9%) was largely contributed by selected services, which included food away from home, telephone and telefax services, and personal transport repair and maintenance.

Inflation pervasiveness declined as the share of consumer price index (CPI) items recording monthly price increases moderated to 42.7% during the quarter (1Q 2023: 56.0%), below the second quarter long-term average (2011-2019) of 43.9%. Notably, inflation pervasiveness dropped in June after a transitory uptick in May following the festive season.

In terms of exchange rate developments, the ringgit depreciated by 5.8% in the second quarter of 2023. However, the ringgit has appreciated by 1.1% so far over the third quarter (as at 15 August 2023), amid growing expectations that monetary policy tightening in the US is nearing its end. 

Financing conditions

The growth in credit to the private non-financial sector moderated to 3.8% (1Q 2023: 4.1%) on account of slower growth in outstanding business loans.

However, outstanding corporate bonds' growth improved to 4.9% (Q1 2023: 4.4%). Outstanding business loans grew by 0.7%, due mainly to lower growth in working capital loans to non-SMEs. Nevertheless, investment-related loan growth remained sustained, with steady growth recorded for the purchase of fixed assets and non-residential properties.

In terms of households, outstanding loans expanded by 5.1%, mainly driven by loans for the purchase of residential properties and cars.

For the rest of the year, the Malaysian economy is projected to expand close to the lower end of the 4.0% to 5.0% range in 2023 amidst the challenging global environment. Such growth will continue to be supported by domestic demand amid improving employment and income as well as the implementation of multi-year projects. Tourist arrivals are expected to continue rising, which would support tourism-related activities.

Looking ahead, both headline and core inflation are projected to trend lower within expectations for the second half of 2023. This could potentially be due to the higher base in the corresponding period last year. Nonetheless, risks to the inflation outlook are subject to the changes to domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments.

Lead image / Bank Negara Malaysia