Will Domestic Demand Spur Growth?

Economists expect the gross domestic product (GDP) growth to ease from the fourth quarter of this year (4Q22) after a robust growth of 14.2% in the 3Q22. Economic strength going forward is buoyed by domestic demand.

Performance is 3Q22 was the strongest quarterly GDP performance since 2Q21 (growth of 15.9%). On a quarter-on-quarter (q-o-q) basis, the economy, however, grew at a slower pace of 1.9% q-o-q, compared with 2Q22’s growth of 3.5% q-o-q. In 2Q22, the economy is to advance by 8.9% y-o-y from a growth of 5% in 1Q22. Others have forecasted growth of 8.4% in 2022

Moving forward, economic growth in 4Q22 and into 2023 would depend on the strength of demand from advanced economies, risk of the higher interest rate environment, escalation of geopolitical conflicts and supply chain disruptions. The hike in interest rates and spending activities have remained resilient. The GDP for this year could be above 7.3% year-on-year (y-o-y), according to CGS-CIMB Research. And for 2023 forecast GDP growth is at 5%. Fitch Solutions’ growth forecast is 4% for 2023. A further two 25 basis points (bps) in rate hikes is expected in 2023 with OPR at 3.25%. Bank Negara expects the full-year 2022 growth to exceed the 7% projected due to healthy growth in the first nine months of 2022. Under Budget 2023, the GDP growth was expected to be between 4% and 5% for 2023 compared with between 6.5% and 7% 2022.

The current account balance would remain in substantial surplus, underpinned by the healthy economic fundamentals and supported by the diversified nature of exports as well as the robust tourism sector. The current account surplus was forecasted at 1.7% of GDP (2023: 2.1%).

But headwinds are expected to kick in from 4Q22. Signs of stress in the manufacturing sector, weaker trade activity will slow economic activity on the external front including from Malaysia’s major trading partner China. Private consumption will also slow down significantly from 11.5% in 2022 to 5% in 2023.

The key constraint on production (GDP) is labour – we need 1.2m workers to plug shortages in manufacturing, plantations, construction and services. The last government has been incompetent in resolving this. Will the next government be more accommodative and entrepreneurial to unleash spare capacity in the private sector and increase domestic demand for 2023?

Reference:

Domestic demand to spur growth, Daljit Dhesi, The Star, November 15, 2022