The big surprise: Malaysia ‘not back to normal’

Economic growth in 2023 was worse than expected and lower than the advance estimates. This paints quite a different picture from the rosy narrative of the main analyses and forecasts.

From Paolo Casadio and Geoffrey Williams, Free Malaysia Today

Instead of the 4%-5% official forecast the 3.7% economic growth in 2023 is below even the most pessimistic forecasts.

The economy actually contracted by 2.1% in Q4 compared to Q3.

This is the biggest quarterly contraction since the Covid-19 pandemic and is partly caused by short-term policies during that period, inherited by the current unity government.

Almost half of the annual growth is due to a rise in inventories or stocks. So firms are producing items that are not being sold due to low domestic and international demand. Manufacturing growth has stagnated at 0.7%.

Among the components of GDP, private consumption contracted by 3% in Q4 in seasonally adjusted terms. This is a staggering 12% decline in annualised terms.

Having declined 0.7% in Q3 there is a technical recession in consumer spending as low incomes hold back consumption. As we predicted, the RM100 e-wallet scheme has not helped and private consumption cannot be considered a pillar of growth for 2024.

Exports rose by 1% in Q4, higher than the 0.6% rise in Q3 so the weaker ringgit and the gain in competitiveness appear to be helping.

There should be no intervention in the foreign exchange markets because this disappointing GDP figure is not caused by the exchange rate.

Weaker sales in overseas markets persist so export oriented companies will not produce or invest so much until this improves.

We do not expect to see much improvement in global demand in 2024 with many major markets already posting stagnation or technical recessions this year.

We had forecast economic growth at 3%-4% for 2024 with a best estimate at 3.5%.

Now even if the economy were to grow at the previous historical potential average rates of 1.2% per quarter we will see only 3.2% growth overall. This will not happen so we expect growth at 3.5% which is now optimistic.

The outcome for growth in 2023 is as we had expected and forecast last year but is not in line with official forecasts or the market consensus which follows the official line.

We are still in a transition phase of the economy, where the shock of the pandemic is over but the effects of the shocks are still present and showing negative long-lasting impact on the economy even if the short-term patches are vanishing.

The standard narrative that lower unemployment leads to higher incomes, spending and growth is wrong and must be challenged.

The idea that Malaysia can rely on trade or tourism and the idea that a weak ringgit is a bad thing must also be challenged.

In fact low unemployment arises because people are forced to work even to meet basic spending due to higher cost of living.

Many women and youths are participating in the workforce because they have no option due to higher prices.

They are taking low-paying jobs and do not have spare income for extra consumption. Disposable incomes are being squeezed for low-income and middle-income groups alike.

The government must change the narrative and understand that high underemployment and forced labour force participation is holding down incomes and consumption, which in turn holds down investment and growth. Overseas demand does not compensate for this.

The government must not raise taxes in this environment. All of the tax rises in Budget 2024 should be postponed, especially the rise in SST and a full review of taxes must be put in place by October for Budget 2025.

The low inflation has different components but it also reflects the lack of pricing power of the factories, in a low demand and volatile scenario. In this environment there is reason to review the OPR and perhaps cut it by 0.25% but this is a close call.

Economic reforms including the Padu scheme, subsidy rationalisation, the progressive wage model and pension reform must be brought forward and accelerated.

Policies that cost a great deal but do not add value, such as the NIMP and NETR should be postponed for now. Spending should be refocused onto policies for raising incomes.

Responsible privatisation of GLC subsidiaries should be introduced with renewed supply-side reforms to reduce government interference in the economy and free up businesses within a low-tax, low-regulation economy with agile, competitive, market-driven reforms.

Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist and Provost for Research and Innovation at Malaysia University of Science and Technology