Boom or Bust? Malaysia’s Economic Growth Hangs in the Balance

Boom or Bust? Malaysia’s Economic Growth Hangs in the Balance

Malaysia’s 2Q24 GDP advance estimate surged to a remarkable 5.8% year-on-year growth, the highest in six quarters since 4Q22, defying economic forecasts and highlighting the nation’s economic resilience. This robust expansion, fuelled by favourable conditions and significant growth across all five major economic sectors, outpaced expectations from UOB Kay Hian Wealth Advisors (5.3%) and the Bloomberg consensus (4.7%).

With an average GDP growth of 5.0% in the first half of 2024, there is now a strong possibility of exceeding our full-year GDP growth forecast of 4.2%. Key drivers such as the ongoing global tech upcycle, increased tourist arrivals and spending, sustained investment flows, and the implementation of catalytic initiatives under national master plans are bolstering Malaysia’s economic resilience despite external uncertainties. The final 2Q24 GDP figure, set to be released on August 16, will provide further insights into the country’s economic trajectory for the rest of the year.

Strong Growth Across All Sectors in Q2

In Q2, Malaysia’s economic sectors demonstrated robust performance, with each of the five major sectors contributing significantly to the overall growth. The services sector led with a 5.6% year-on-year growth, up from 4.7% in the first quarter, driven by increased tourism and supportive government policies such as New Industrial Master Plan (NIMP2030), MADANI Economy, and Progressive Wage Policy, boosting wholesale and retail trade, transportation and storage, business services, and finance and insurance.

The manufacturing sector grew by 4.7%, compared to 1.9% in the first quarter, due to a recovery in the export sector from the global tech upcycle, with export-oriented production rising by 3.2% and domestic production by 8.0% in April and May. The construction sector saw a notable boost with a 17.2% growth, up from 11.9%, driven by civil engineering and specialized construction activities. The mining and quarrying sector recorded a moderated growth of 3.3%, down from 5.7%, primarily due to increased natural gas production. The agriculture sector accelerated to a 7.1% growth, up from 1.6%, largely thanks to strong oil palm and livestock production, offsetting declines in rubber and forestry and logging.

13% Increase in Pledged Investments, Reaching MYR 83.7 billion

In 1Q24, Malaysia secured MYR 83.7 billion in pledged investments, marking a 13% increase from MYR 74.1 billion in Q1 2023, signalling strong investor confidence and economic potential. The Malaysian Investment Development Authority (MIDA) reported that from January 2021 to March 2024, the National Committee on Investment (NCI) approved 2,638 industrial projects, with 77.2% in various stages of implementation and 21.1% in planning, while only 1.6% have yet to start. 

Significant projects approved this quarter include a MYR 30.1 billion investment by a global semiconductor leader to build the world’s largest 200-millimeter silicon carbide power plant in Kulim, Kedah, and a MYR 1.4 billion investment by a major Chinese automaker to boost production in Malaysia. In the services sector, a leader in logistics is investing MYR 245.5 million in a smart warehouse, and a cement company is investing MYR 120 million in a 10MW Waste Heat Recovery System in Langkawi. As of the end of May 2024, MIDA has 1,775 proposed projects worth MYR 68 billion awaiting approval, including MYR 44.7 billion in services and MYR 23.3 billion in manufacturing, plus an additional MYR 60.4 billion in high- potential leads.

Strong Performance of Malaysian Stock Market in First Half of 2024

The FBMKLCI surged by 9.3% in the first half of 2024, reflecting the robust performance of Malaysia’s stock market and investor optimism. The KLCI reached its highest point for the first half of 2024 on 23 May, achieving a multi-year high since 2021. However, the all- time high of 1,895, recorded on 19 April 2018, remains a significant distance away. Mid- small caps performed strongly in the first half of 2024, with the FBM70 gaining 22.1% and the FBMSC rising by 18%.

Regionally, the KLCI outperformed its counterparts in Singapore, the Philippines, Indonesia, and Thailand, positioning itself as the second-best performing market after Vietnam. Gains were seen across a wide range of sectors, particularly telecommunications, with the exception of media and petrochemicals. The property, construction, and utility sectors experienced substantial growth, primarily driven by their participation in Iskandar Puteri and Kulai-Sedenak in Johor, as well as their strong presence in the data centre industry. The construction sector saw a boost in foreign direct investment, leading to increased contracts and job opportunities in data centre and industrial building construction.

Anticipated Growth for Malaysia in 2H 2024: A Nonlinear Path

Looking ahead, Malaysia’s full-year GDP growth is expected to be 4.8%-5.3%, driven by a rebound in exports and strong domestic spending. In comparison to the first half of 2024, Malaysia’s Manufacturing PMI is expected to be above 50 points as optimism remains high following the expected increase in new orders, despite waning business confidence. Improvements are occurring not only in Malaysia, but also in countries such as the United States, China, and India, as the economy moves towards positive growth. We expect interest rates to remain at 3.00% for the rest of 2024. As we approach the fourth quarter of 2024, there are some possibilities for a managed-float mechanism for the RON95 targeted subsidy rollout. Once the government implements targeted subsidies for the RON95, inflation may rise.

Source: UOBKHWA based on PMI and Inflation rate from Mar 2023 to June 2024

There are two main events that will impact the Malaysian economy: the possibility of the US Federal Reserve cutting interest rates in September 2024 and the US Presidential election in November 2024.

A potential US Federal Reserve rate cut could have mixed effects on Malaysia’s economy, influencing both opportunities and challenges due to global economic interdependencies. Key factors include lower demand in USD-linked markets and probable currency appreciation, presenting both opportunities and challenges. Malaysian exports to USD-linked countries, such as the United States, risk lower demand as the US economy weakens, thereby impacting Malaysia’s economic growth. We expect the Federal Reserve to decrease interest rates by 25 basis points. With Malaysia’s economic development continuing over the next six months, we estimate the Ringgit will appreciate to RM 4.60-4.55 per USD by the end of 2024. A stronger Ringgit against the US Dollar may reduce import costs while increasing export prices, reducing competitiveness. However, lower interest rates may attract foreign investment into Malaysian assets, increasing economic activity and promoting technological developments. Additionally, cheaper loans and credit cards may enhance consumer borrowing, leading to more disposable income and spending, boosting domestic demand and benefiting various sectors of the economy.

Although some individuals in the region will be concerned about Trump 2.0, not all will perceive a significant difference between a Republican or Democrat being the next commander-in-chief of the United States. This is due to fundamental factors such as protectionist measures and strategic competition between the United States and China. The US economy will continue to expand if the elevated debt can be addressed with minimal negative impact by the incoming president. Trump’s pro-growth policies are likely to be accompanied by additional inflation spikes, increasing the potential for a shallower interest-rate easing. Trump’s team is considering two measures to commence his second term: a border-security and immigration package, and an extension of his 2017 tax cuts, set to expire in early 2025. Trump is also contemplating the imposition of import tariffs of 60% or higher on Chinese products and a blanket 10% tariff on all US imports, aimed at safeguarding US manufacturing companies and increasing tax revenue. If the Democrats win the election, current policies such as climate action, healthcare expansion, and tax reforms targeting wealthy earners are expected to continue.

Therefore, what are the potential consequences for Malaysia? Malaysia is currently the sixth-largest semiconductor exporter in the world and controls 13% of the global market for chip packaging, assembly, and testing services. Malaysia is a critical player in the global technology sector, providing 25% of the semiconductor components that fuel US technology requirements. Global leaders such as Intel, Infineon, and Amazon Web Services are investing billions to enhance their production capabilities in Malaysia. The US-China trade and technology rivalry will be advantageous to Malaysia, in addition to the ongoing trade diversion. From 2018 to 2022, Malaysia’s exports to the United States increased by 7.7% annually during the Trump administration’s implementation of trade tariffs with China in 2018-2019.

In conclusion, Malaysia’s economic outlook for the rest of 2024 remains optimistic yet cautious. With robust sector performances and significant investment inflows, the nation is well-positioned for growth. However, external factors such as US monetary policies and political changes will require strategic navigation to maintain economic stability and growth.

This article is brought to you by UOB Kay Hian Wealth Advisors Sdn Bhd.