Malaysia's 'great transition'
After extraordinary and unsustainable growth in 2022, Malaysia will slow down in 2023 and the way out will depend on how to attack and solve structural economic problems.
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At the end of November, just after the election, we wrote that the most urgent and delicate problem for the government is how to manage the transition from a booming but unsustainable economy, to to a more moderate and realistic rate of growth.
The final 4Q GDP data will be released on Friday and we expect to see a slowdown of the economy after four quarters of skyrocketing performance. Unless the data is revised, which is a real possibility, average growth for 2022 will be around 9%.
This is the type of growth experienced in the 1990s and almost touched in 2000. Since then, the underlying potential rate of growth has decreased to around 4.5% due to the structural changes caused by the lockdowns. Simply put, the exceptional economic growth last year was double the actual potential growth of the economy.
So the GDP data on Friday will help us to understand the next phase of economic growth and the transition we will experience. We expect negative growth of 1% in Q4 compared to Q3 and annual growth of 8.4% compared to last year. This will give overall growth of around 8.1% for the full year.
Just as the Malaysian economy was overshooting its potential and spending all its available bullets, from the exceptional government stimulus packages to the EPF withdrawals, the more advanced economies experienced a clear deceleration and now they are heading towards a slower growth phase.
Malaysia has not decoupled from the world economy and is still exposed to the risk of a technical recession due to the weakness in the international environment. Nonetheless the recent global growth forecast of the World Bank at 1.7% suggest that it is possible for 2023 to end with positive growth on average but at around half of the potential.
The flow of recent data in Malaysia confirms that this transition is already in place and suggests a quite drastic change in the overall economic scenario. The pause in the OPR by Bank Negara is also consistent with a transitional phase of the economy.
The data on industrial production, producer prices and sales in the manufacturing sector shows that the transition is already evident in the manufacturing sector.
Industrial sector indicators (seasonally adjusted)