What is the economic outlook for the rest of 2024?

 

Growth and investment in Malaysia have improved with the economy growing by 5.9% in the second quarter of this year.

This is due to increased household spending, stronger exports, higher tourist income and improved private investments.

While policy support has been in place, this is mainly private sector driven growth and shows the value of less intervention.

Possibilities emerge when the government steps back.

The recent slew of foreign direct investments (FDI) has been mainly in the technology sector and require specific resources.

Data centres for example are huge consumers of electricity and water which Malaysia has available cheaply.

The National Energy Transition Roadmap (NETR) will increase renewable energy generation which is not only cheaper but helps foreign companies meet net-zero targets with low-carbon electricity they cannot get at home.

Others are attracted by the rare earth resources or other natural resources.

In this sense Malaysia is still driven by commodities albeit new commodities for high energy demand technologies.

Other issues such as workforce or the regulatory environment are less important for the big tech investors.

The ringgit has been volatile due to external factors but the intervention by BNM to repatriate profits has helped.

The ringgit is now at a 16-month high against the US dollar and as of Aug 20, 2024 it strengthened by 4.85% and is heading towards a fair value range of RM4.30 to RM4.40 to the dollar.

It has also outperformed all other regional currencies such as the Singapore dollar which rose 1.16%, while others have weakened.

This is due to improving external factors and weak sentiments that have weighed on the ringgit and there is now a greater clarity on the policy rate directions in advanced economies.

The US Federal Reserve is expected to cut interest rates in September and the Bank of England and the European Central Bank have already cut by 25 bps.

This narrows the interest rate differentials against the OPR which is at 3%.

The ringgit will always be subject to external factors outside of the control of Malaysian policymakers but for now it is in better shape, as we predicted.

The latest GDP data is very positive but since the Covid-19 lockdowns economic growth has been very volatile.

In 2023 the forecast was 4% to 5% growth and most analysts were in that range but the outcome was 3.6%, as we forecast.

The current data is above the underlying trend growth potential.

If it returns to normal trend growth the outcome would be 4% to 4.5%.

External factors are affecting net trade. Although exports and total trade have increased, imports have also increased faster than exports so the contribution from net trade has been falling significantly since August last year.

So global headwinds remain.

Domestic factors such as the Akaun Fleksibel withdrawals will support consumer demand but so far these have been below the expected RM25 billion and most of this has already filtered into the economy.

So there will still be more to come from this source but it looks more conservative than expected.

Although inflation is currently at normal 2% levels, if the economy grows above potential this signals future inflation which must be tackled now.

We do not expect interest rate increases but prolonged above trend growth raises the upside risk of higher interest rates.

The improving growth prospects and manageable inflation provides Malaysia with space to focus on helping to strengthen economic competitiveness.

Policy should be focused on both price and growth stability so lower growth is desirable in the second half of the year to avoid overheating.

There is now a clear window of opportunity to focus on structural reforms to boosts incomes. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.