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Malaysia’s economy likely eked out a modest expansion in the final quarter of 2023, offering a glimmer of hope amidst mounting concerns about weakening momentum and a cloudy outlook for the year ahead. Official data released on Friday showed GDP growth edging up to 3.4% year-on-year in the October-December period, marginally faster than the 3.3% recorded in the previous quarter.
Despite the positive headline figure, the underlying details paint a picture of an economy struggling to maintain its footing. Construction, a key driver of growth in recent years, decelerated sharply, with its quarterly rise of 2.5% barely a shadow of the previous quarter’s 7.2% surge. The manufacturing sector also sputtered, barely crawling into positive territory with a meagre 0.1% expansion.
This lacklustre performance across major sectors underscores the growing headwinds Malaysia’s economy faces. Exports, the lifeblood of many Southeast Asian economies, have been in a downward spiral since March 2023, shrinking by a worrying 8% for the year as a whole. This slump in external demand, coupled with rising interest rates and a cooling labour market, is casting a long shadow over Malaysia’s growth prospects.
While the headline GDP figure for 2023 came in at 3.8%, falling short of both the government’s 4% target and the stratospheric 8.7% rebound of 2022, it nevertheless reflects the resilience of domestic consumption. Buoyant household spending helped offset the drag from waning exports and sluggish investment. However, analysts warn that even this pillar of strength could show cracks in the coming months, particularly if planned subsidy cuts materialize, potentially fueling inflation and squeezing household budgets.
“We think the economy is set to remain weak in the near term,” declared Shivaan Tandon, an Emerging Asia Economist at Capital Economics, in a note. He outlined a litany of risk factors weighing on Malaysia’s future, including elevated interest rates, a cooling labour market, subdued commodity prices, and, of course, the ever-present spectre of slowing global demand.
The government, facing a tight fiscal situation, has announced plans to phase out fuel and other subsidies, a move designed to rationalize spending and promote fiscal sustainability. However, economists caution that the implementation of these cuts needs to be handled carefully to avoid triggering a sharp rise in inflation and potentially pushing more Malaysians into poverty.
Looking beyond the immediate challenges, Malaysia’s long-term growth prospects remain moderately attractive. Its strategic location, well-developed infrastructure, and skilled workforce continue to draw foreign investment and support export-oriented industries. However, navigating the current headwinds and unlocking the country’s full potential will require a multi-pronged approach, focusing on diversifying the economy, promoting innovation, and building economic resilience in the face of a volatile global landscape.
Lowering subsidies can free up government resources for investments in more productive sectors like education and healthcare, ultimately spurring economic growth, Eliminating subsidies can incentivize producers to become more efficient and competitive, potentially leading to lower prices in the long run and Infrastructure projects can create jobs in the construction sector and stimulate demand for related industries like steel and cement.
Malaysia’s government has committed to phasing out fuel and other subsidies, a move long advocated by economists for its potential to improve fiscal health and encourage efficient resource allocation. However, the immediate consequences could be a significant rise in living costs, particularly for low-income households who rely heavily on subsidized goods and services.