Consumer spending to decline in second half of 2023?
By: Assoc. Prof. Dr. Mohd. Edil Abd. Sukor
Although Bank Negara Malaysia (BNM) has recently maintained its prediction that Malaysia’s economy would expand in a range of 4% to 5% in 2023, some economists argue that several economic challenges and uncertainties such as the lag impact of higher interest rates, subsidy rationalisation, political uncertainty and slowing global performance may dampen near-term outlook for consumer spending. As a nation known for its vibrant retail sector and consumer-driven economy, consumer spending plays a crucial role in the economic growth and stability of Malaysia.
On 3rd May 2023, BNM has increased the overnight policy rate (OPR) by 0.25% to 3%. This is the first time this year the OPR has been hiked after being kept at 2.75% twice in January and March. Rising interest will put pressure on borrowers to service their existing debt and diverting funds away from discretionary spending. This, in turn, can lead to a decrease in spending, affecting retail sectors and businesses dependent on consumer demand at least in the second half of 2023.
Similarly, the proposed subsidy rationalization announced recently by the Malaysian government such as electricity tariff hikes for high-volume domestic users who are currently enjoying higher subsidies than low-volume users can also negatively affects consumer spending in a short run. Unless if it is done on a gradual basis and efficiently offered targeted subsidies to the poor and underprivileged, any further cut in subsidy will normally lead to higher inflation and reduced consumer purchasing power.
Slower global demand and performance is expected to exacerbate the near-term forecast for consumer spending. It is reported that the first four months of 2023’s Malaysian export contracted by 2.6 per cent and pose downside risks for the full-year export outlook. This situation will lead the businesses to face lower profits, and they might respond by implementing cost-cutting measures such as downsizing or freezing wage increases. When consumers experience uncertainty or a decline in their disposable income, they are likely to limit their spending.
The dissolution of state assemblies for all the six states (Selangor, Negri Sembilan, Penang, Kedah, Terengganu and Kelantan) which is expected to take place in June this year may also put the domestic business environment in a challenging situation due to Malaysia’s divided political landscape. These state elections are set to serve as an important barometer to gauge support for the unity government and to ensure continued political stability post the 15th General Election. Political stability is critical in ensuring business expansion, job creation and higher incomes, all of which can contribute to increase in consumer spending.
Overall, the consumer spending pattern in second half-year of this year is most likely to show a declining trend due to both domestic and external headwinds. Overcoming slower consumer spending requires a multi-faceted approach involving various stakeholders. Several measures such as ensuring stability of the job market and income levels are pivotal in boosting consumer confidence and discretionary spending. Policies that focus on stimulating domestic consumption, such as tax incentives or cash assistance programs may also encourage spending and drive economic growth. Similarly, managing inflationary pressures and ensuring price stability are critical for sustaining consumer purchasing power. Continuous monitoring and adaptation to changing circumstances will be crucial for policymakers, businesses, and consumers to navigate the path to economic recovery and foster sustainable consumer spending especially for a consumer-driven economy nation like Malaysia.
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The author is an Associate Professor at the Department of Finance, Faculty of Business and Economics, Universiti Malaya. He may be contacted at [email protected]
-DG
