External environment expected to remain challenging in near term, says BNM governor

BANK Negara Malaysia (BNM) expects the Malaysian economy to expand closer to the lower end of the 4.0% to 5.0% range in 2023, underpinned by domestic demand.

The moderate growth was partly driven by several temporary factors, including plant maintenance in the mining sector, the hot weather affecting the agricultural output; as well as high-risk effects from the economic reopening of policy measures in the second quarter of last year.

“Based on our estimation, growth could have been 40 basis points higher than the entry point for the second quarter,” BNM governor Datuk Shaik Abdul Rasheed Abdul Ghaffour told reporters at a joint press conference with the Department of Statistics Malaysia (DOSM) yesterday.

It was announced that the nation’s GDP in the second quarter of 2023 (2Q23) moderated to 2.9% year-on-year (yoy), its slowest pace since Q3 2021. The growth, down from 5.6% in the previous quarter, was driven largely by the services and construction sectors.

Going forward, Abdul Rasheed said growth will be supported by four factors: continued recovery in the labour market, implementation of new and existing investment projects; higher tourism activity; as well as for the dissipation of planned maintenance activities in the mining sector.

“Nevertheless, they are baseline forecasts. There will be external demand that is expected to weigh on near-term growth,” he said.

He said the economy is facing downside risks stemming from weaker-than-expected global growth and a deeper or longer-than-expected return cycle.

Beyond that, he said there could be lower than expected commodity production domestically due to stronger impact from El Nino and follow planned maintenance on the outside tourism activity to pick up even more, while progress of investment projects could be fostered and extracted.

“In the near term, the external environment is expected to remain challenging,” he said.

As a small open economy, Malaysia is affected by the slowdown in global demand. Niches exports also declined in the second quarter of this year, which was driven mainly by retail manufactured goods that met the downturn in the global tax cycle and also lower commodity prices. The global semiconductor sales, which had been finding thus far, are showing tentative signs of bottoming out.

In addition, tourism-related activities are also expected to pick up further and provide support to grow this course.

The labour market continues to improve in order to determine the unemployment rate declined further to 3.4% in June, and this is driven by steady economic growth. Vulnerable segments such as women and youth have also recovered to pre-pandemic levels, albeit room for improvement of stable participation amongst human remains.

On inflation, he said: “We see that risk of inflation stems mainly from global developments, both headline and core inflation are expected to moderate over the course of 2033.”

Headline inflation is expected to have reached close to the lower bound of the earlier communicated forecast range of between 2.8 to 3.8%. While cost pressures have decreased, core inflation will remain elevated levels as demand conditions remain rather firm. The balance of risk inflation is mostly tied to global developments.

Near-term upside risks include the higher global commodity prices from geopolitical conflicts and adverse weather events like the El-Nino, as well as higher important input to meet the exchange rate decision.

On monetary policy, the MPC has maintained the OPR 3% at the July regulatory meeting. At the current OPR level, the MPC deems the market policy stands to be slightly accommodating and also supportive of the economy.

Going forward, he said the MPC will continue to closely monitor the ongoing domestic and global developments and their impact on domestic inflation and its growth prospects.

Commenting on global growth, Abdul Rasheed said that the growth is slower in Asia mainly due to the headwinds from related cost measures, highly constrained and also weaker constraints. Nonetheless, growth remains supported by Malaysia’s resilient domestic demand, strong labour market conditions and continued improvements in global tourism.

On China’s reopening, Abdul Rasheed said: “We have been rather conservative about China’s forecast. Over the decades, we have deliberately developed a highly diversified economy and diversified trading partners – which means we don’t rely too much on one particular industry or one particular trade. While China is our second largest export market, it only accounts for 13.6% of the nation’s total exports.”

By AUFA MARDHIAH / pic MUHD AMIN NAHARUL