Highlights

• The Malaysian economy expanded by 5.3% YoY in the third quarter of this year, aligning with both consensus expectations and the Department of Statistics' advanced estimates. This result reflects a resilient performance, although it marks a slight moderation from the 5.9% YoY GDP growth recorded in the second quarter of 2024. 

• As outlined in Figure 1 below, several sectors registered faster growth than initially projected, particularly agriculture, construction, manufacturing, and import duties. Conversely, the mining sector experienced a sharper-than-expected decline, while growth in the services sector was more moderate than anticipated in the results. 

• When the Department of Statistics Malaysia (DOSM) first released the 3Q24 GDP estimates, they were based on comprehensive economic data from July and August, supplemented by key statistics from September, including data on commodity production and pricing trends. This early inclusion of partial September data provided a solid preliminary gauge of overall economic performance, leading to a revision in the final assessment. 

• In terms of absolute value, the total output amounted to RM419.17bn, surpassing 3Q23's RM397.92bn and above 2Q24's RM400.74bn. On a non-seasonally adjusted QoQ basis, it witnessed a 4.6% increase, compared to the previous quarter's 0.8% gain. 

• The monthly economic performance displayed resilient growth of 7.4% YoY in July 2024 but experienced a moderation in subsequent months, registering 4.7% and 4.0% YoY growth in August and September 2024, respectively. This deceleration may have been influenced by more cautious consumer spending stemming from the Diesel subsidy rationalization and heightened concerns about the global economic landscape at the time, including uncertainties linked to the U.S. presidential election. 

• On another note, the nominal GDP increased by 5.9% YoY to RM490.64bn in 3Q24 (2Q24: 7.5% YoY). To observe how overall economic growth relates to price level changes, we also assessed the GDP Deflator, which represents the change in prices for all goods and services produced in the country. It rose by 0.6% YoY in 3Q24, compared with 1.5% YoY in the previous quarter. The CPI and core-CPI was up by 1.9% YoY during the quarter. 

• Briefly, all sectors on the supply side showed better growth except for the mining sector. Namely, the Services (5.2% YoY) and Manufacturing (5.6%) sectors continued to propel the overall performance. Additionally, the construction sector recorded the largest growth during the quarter and has consistently posted robust growth since the beginning of the year. Meanwhile, Aggregate Domestic Demand (ADD) that consists of total spending and investment were the main catalysts of the economy on the demand side that offset the contraction seen in net exports.

Our View/Outlook

• Overall, it is still a promising performance for Malaysia, bolstered by several key factors such as the flourishing labour market, and consistent domestic demand. Additionally, strategic government initiatives, increased foreign investments, and advancements in technology and infrastructure further support the overall performance. With these elements in place, Malaysia is well-positioned for sustained economic growth and stability. 

• Considering the steady GDP performance in the third quarter of 2024, the Malaysian economy expanded by 5.2% YoY in the first nine months of the year. This growth was driven primarily by significant gains in the services (9M24: 5.3% YoY), construction (9M24: 16.4% YoY), agriculture (9M24: 4.3% YoY) sectors. Additionally, the manufacturing sector recorded more promising growth during the same period at 4.1% YoY. On the demand side, personal spending increased by 5.3% YoY, contributing positively to the overall GDP. This was further supported by significant growth in gross fixed capital formation (GFCF), which rose by 12.1% YoY. These developments underscored the diversified nature of Malaysia's economy, with robust contributions from both the supply and demand sides, indicating a well-rounded and resilient economic expansion.

• As we approach the final quarter of the year, there is a tangible risk of further moderation in Malaysia’s economic performance, primarily driven by subdued external demand momentum. Our cautiously optimistic outlook is tempered by elevated risks from the global sector, notably the impact of past monetary tightening across major economies and China's struggle on its economic recovery. Given Malaysia’s reliance on the health of key trading partners like China and the US, these factors could weigh heavily on export performance. 

• Supporting this outlook, Malaysia’s August’s leading index — a predictive tool for economic trends four to six months ahead — registered a moderate YoY increase of 4.0% YoY to 114.3 points, as compared with 5.2% YoY in the previous month. The index also experienced a contraction, declining by 0.7% due to significant reductions in the Real Imports of Semi-Conductors (-0.8% MoM), Expected Sales Value in Manufacturing (-0.6% MoM) and Bursa Malaysia Industrial Index (-0.3% MoM). 

• However, Malaysia's anticipated growth outlook will continue to be supported by a progressive decline in the unemployment rate, which has stabilised at a pre-pandemic level of 3.2% since August this year. This improvement is further reflected in a significant reduction in the average number of unemployed individuals, with figures for September standing at 555.3k compared to 558.5k in August 2024. Additionally, the average number of employed persons has been on a steady upward trajectory, reaching a record high of 16.69mn in September. Labour supply remained forthcoming as the labour force participation rate remained at a historical high of 70.5% in 3Q 2024 

• Beyond labour market dynamics, sustained growth in personal expenditure is anticipated due to festive celebrations in December, along with manageable inflation and stable household income levels. These factors are expected to bolster consumer spending, which remains a crucial driver of economic growth. Furthermore, investment activities are likely to continue providing a key impetus to GDP progress, as ongoing infrastructure projects, private sector expansion, and favourable policy support. 

• Moreover, a resurgence in tourism activity, fuelled by increased international arrivals and a robust uptick in domestic travel, is expected to provide further impetus to the services sector and private expenditure. As tourism gains momentum, related industries such as hospitality, retail, and transportation will experience growth, making substantial contributions to overall economic expansion. Given that the services sector already constitutes more than 50% of Malaysia’s GDP, it is poised to remain a pivotal driver of economic progress. As of September 2024, Malaysia recorded 18.38mn tourist arrivals, marking a 27% YoY increase from the 14.47mn arrivals in the first nine months of 2023. This notable growth underscores the sector’s vital role in economic recovery and its potential to sustain momentum through the final quarter of the year. 

• As third-quarter GDP results aligned with our projections (5.2% YoY), we uphold our annual GDP forecast of 5.0%. This reflects the underlying strength and resilience of Malaysia’s economic fundamentals, building on the previous year's growth of 3.6%. For the final quarter, we anticipate growth to register at 4.7% YoY. 

• During the analyst briefing, Bank Negara Malaysia (BNM) highlighted the following key points:
  • Global growth remains sustained as the lagged effects of high interest rates are offset by a resilient labour market and lower inflation.
     
  • Strong expansion in investment activities, higher goods exports, robust tourism spending, and increased household spending, supported by positive labour market conditions and policy measures, contributed to growth in 3Q24.
     
  • Weaker oil and gas production, due to maintenance activities, acted as a drag on growth.
     
  • BNM anticipates that the deceleration in private consumption will be mitigated by stable income levels and promising employment figures moving forward. 
     
  • Despite a challenging environment, including the ringgit's weakest performance this year, Malaysia's economy has demonstrated resilience. With the uncertain outlook of Trump’s policies, Malaysia’s solid economic fundamentals will help navigate these challenges.
     
  • While Malaysia, as an open economy, will be impacted by global uncertainties, the significant contribution of domestic demand and trade diversification will mitigate potential risks from US-China Tensions.
     
  • The ringgit's value will continue to be driven by market forces and US policies. Although it is still early to predict future movements, BNM believes that Malaysia’s strong economic fundamentals will support a return to fair value for the ringgit.
     
  • Malaysia has successfully attracted Chinese tourists, and while numbers have not fully recovered to pre-pandemic levels, the increasing tourism activity will have a positive impact.
     
  • The private sector is playing a larger role in supporting investment, particularly in high-tech and knowledge-intensive sectors. The growing share of investment in services and electrical & electronics (E&E) manufacturing will enhance future exports and productive capacity.
     
  • Malaysia's inflation is expected to range between 2% and 3.5%, with fluctuations anticipated over time, but it will eventually normalise.
     
• Looking ahead, Malaysia’s strong economic fundamentals, improved employment prospects, sustained consumer and business confidence, and ongoing policy support for vulnerable groups are expected to drive domestic demand in 2025. We project Malaysia’s 2025 real GDP growth to range between 4.8% and 5.3%, with a midpoint estimate of 5.1%. Key catalysts for next year's growth include increased disposable income driven by cash aid and salary increments, a resurgence in tourism activity in preparation for Visit Malaysia 2026, sustained external demand performance, and the strengthening of the ringgit. 

• Concerns regarding the stability of the US economy are intensifying, alongside expectations of a prolonged structural slowdown in China. Such a scenario underscores the heightened vulnerability of economies with significant trade exposure to these nations. Moreover, the geopolitical climate remains complex, with U.S.-China relations continuing to be fraught under the spectre of protectionist policies, including escalating tariffs that have far-reaching implications for global trade flows and investor sentiment. This adds another layer of uncertainty for Malaysia’s trade-reliant economy.

Source: TA Research - 18 Nov 2024