Kuala Lumpur: The World Bank has cut its target for Malaysia’s gross domestic product (GDP) to 3.9% from 4.3% for 2023 amidst a substantial deceleration in external demand.
However, domestic demand will continue to support economic resilience in the country, it said today.
Apurva Sanghi, who is the World Bank’s lead economist for Malaysia, said the reason for its downward revision comes as no surprise – anemic global growth and weak external demand as export numbers have contracted by 3.3% and 9.4% in the first two quarters of this year.
Noting Malaysia’s sensitivity to changes in external demand, he estimates a 1% fall in the US growth rate could reduce Malaysia’s growth by 0.82%, and a 1% reduction in China’s growth could reduce Malaysia’s by 0.45%.
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“We project stronger growth next year based on stronger global growth, higher oil prices, stronger domestic demand, higher number of approved investments, tourism bounce back, improvements in the labour market, and overall easing inflation.
“Indeed 2024 underscores an improvement in growth momentum relative to 2023,” he said at World Bank Group’s East Asia and Pacific October 2023 economic update briefing.
Apurva said it is not just external factors weighing down Malaysia’s growth, it is also domestic factors such as high base effects, lagging effects of rate hikes, and extreme weather events.
He noted the dampening effects on spending growth from monetary policy normalisation back to pre-Covid levels, especially on interest rate sensitive sectors.
Additionally, he said extreme weather events had affected agricultural output earlier this year.
“As most rice production in Malaysia is concentrated in northern Malaysia, extreme weather events can have a disproportionate impact on food security,” he said.
He said Bank Negara Malaysia had also flagged plant maintenance in the mining sector as a temporary factor that affected second quarter growth this year, and hence growth this year.
He also said limited fiscal space remains a key challenge for the economy, and that nearly 490,000 Malaysian households continue to live below the national poverty line and exhibit slower recovery from the pandemic.
Apurva pointed out Malaysia has the second highest household debt after Thailand in the region, and the lag effects of monetary policy would be expected to have an impact this year.
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