Malaysia’s economy picked up by 3.9% in 1Q2024 (4Q2023: 3.0%) based on the advanced estimate. This is according to MARC. The manufacturing sector registered a 1.9% rebound after two quarters of contraction, while growth in the construction sector accelerated to 9.8% (4Q2023: 3.5%), while the services sector grew by 4.4% (4Q2023: 4.2%). Real impact on GDP is the services and manufacturing sectors which together make up over 80% of the economy.
The upward trend in private consumption suggests an optimistic outlook. However, the outlook requires a sustained rebound in tourism. This requires continued coordination amid higher competition from ASEAN peers. While tourist arrivals are projected to normalise in 2024, the government reported over 0.53 million Chinese tourist arrivals in 2M2024, which if annualised is 3.18 million, 36.4% below the full year projection of 5 million.
The US’ GDP growth slowed to 1.6% in 1Q2024 compared to market consensus of 2.5% (4Q2023: 3.4%). However, the weaker growth does not boost expectation of rate cuts as the US Consumer Price Index remained at 3.5% in March (Feb: 3.2%), exceeding the market consensus of 3.4%. The Malaysian Government Securities and US Treasury markets continued to retreat due to higher-than-expected US inflation. The likelihood of the Federal Reserve (Fed) delaying rate cuts is now apparent. Local corporate bond yields increased across all categories.
Signs of interest rate outlook divergence, such as the German bund rally in March, have surfaced due to decelerating inflation and weak growth prospects in the eurozone. While German bund yields rose in April due to the recent higher US inflation and delay in US rate cuts, eurozone inflation, in contrast, eased to 2.4% in March (Feb: 2.6%). The sustained disinflationary trend is expected to increase the rate cut prospects in the eurozone. The improved levels of economic activity in the eurozone are expected to not limit prospects for rate cuts given its track record of bumpy growth.
Year-to-date inflation (for Malaysia) of 1.8% compared to 1.5% in 4Q2023 points to the end of the disinflationary trend. Going forward, inflation is expected to be between 2.5% and 3.0% in 2024 (2023: 2.5%) with a gradual uptick in the near future due to spill overs from new tax measures and the execution of targeted subsidies. In view of the present level of growth and inflation, Bank Negara Malaysia has maintained the policy rate at 3.00% in its May meeting, which is not good news for any possible appreciation of exchange rate.
Reference:
Monthly review: Early signs of interest rate outlook divergence, Press Announcement, MARC Ratings Berhad, 8 May 2024
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