Malaysia’s economy to grow by 4-5% this year, central bank says

6 min read

Malaysia’s economy is expected to grow between 4.0% and 5.0% in 2023, according to the country’s central bank, Bank Negara Malaysia. This projection is based on the anticipated strong domestic demand, which is expected to offset the challenges posed by external factors such as slowing global growth and rising living and input costs.

Moderate growth this year

Malaysia’s economic growth has been strong in recent years, with a growth rate of 8.7% expected in 2022. However, Bank Negara Malaysia expects this growth rate to moderate in 2023 due to the challenges posed by external factors such as the global economic slowdown and geopolitical tensions.

Despite these challenges, Malaysia‘s economy is expected to continue growing in 2023. The country has a strong domestic market, with a population of over 32 million people, and a diversified economy that is not overly dependent on any one industry or sector.

Tourism and infrastructure

As one of the countries with the most developed infrastructures in Asia Pacific, the Malaysian government has also implemented a number of policies to support economic growth, such as the implementation of large infrastructure projects and the promotion of tourism.

However, the challenges posed by external factors cannot be ignored. Malaysia is an open economy that is heavily reliant on exports, particularly to China and the United States. Slowing global growth and rising trade tensions could have a significant impact on the country’s exports and economic growth.

Inflation poses uncertainty

In addition, rising living and input costs could put pressure on households and businesses. Inflation is a concern for the central bank, with headline inflation expected to average between 2.8% and 3.8% in 2023. This is slightly lower than the 3.3% inflation rate expected in 2022, but still above the government’s target range of 2% to 3%.

Bank Negara Malaysia expects both headline inflation and core inflation to remain elevated in the near term due to continued strong domestic demand and an improving labor market. However, the central bank believes that improvements in supply constraints and domestic price controls and subsidies may help ease inflationary pressures.

The central bank also believes that the inflation outlook in 2023 is “highly uncertain” due to a number of external factors, such as the prolonged geopolitical conflict in Ukraine and extreme weather conditions, that could drive inflation higher.

Despite these challenges, Bank Negara Malaysia views the risks to Malaysia’s growth forecast as fairly balanced. While downside risks mainly stem from external factors such as weaker-than-expected global growth and rising geopolitical tensions, there are also upside risks to the country’s growth, such as improving labor-market conditions and stronger tourism activity.

The government is also taking steps to support economic growth, such as the implementation of large infrastructure projects. These projects are expected to boost economic activity and create jobs, which could help offset some of the negative impact of external factors on the economy.

Challenges

One of the key challenges facing Malaysia’s economy is the slowdown in global growth. The International Monetary Fund (IMF) recently downgraded its global growth forecast for 2022 from 4.9% to 4.4%. This slowdown is expected to have a negative impact on Malaysia’s exports, particularly to China and the United States.

Malaysia is also facing rising trade tensions, particularly between the United States and China. The ongoing trade dispute between these two countries has led to tariffs being imposed on a wide range of goods, which has had a negative impact on global trade.

However, Malaysia is not overly dependent on exports to these two countries. The country has a diversified economy that is not overly reliant on any one industry or sector. In addition, the government has been working to diversify its export markets, particularly in the Asia-Pacific region.

The government has also been promoting tourism as a way to support economic growth. Malaysia is a popular tourist destination, particularly among visitors from other Asian countries.

On the other hand, there are also potential upside risks to Malaysia’s growth forecast, according to Bank Negara. These include improving labor-market conditions, stronger tourism activity, and the implementation of government projects.

Malaysia’s labor market has been showing signs of improvement in recent years. In 2022, the country’s unemployment rate is expected to drop to 3.8%, down from 4.3% in 2021. This trend is expected to continue in 2023, which should support consumer spending and overall economic growth.

Tourism is also expected to be a key driver of Malaysia’s economy in 2023. The country has been working to diversify its tourism offerings beyond its traditional beach destinations and cultural attractions. The government’s Visit Malaysia 2023 campaign aims to attract 30 million tourists to the country, which would be a significant increase from the 26 million visitors in 2019. This campaign is expected to boost spending in the tourism sector and support job creation.

The implementation of government projects could also support Malaysia’s economic growth in 2023. The government has announced several infrastructure projects, including the East Coast Rail Link and the Kuala Lumpur-Singapore High-Speed Rail, which could create jobs and stimulate economic activity.

Despite these potential upside risks, there are still significant challenges facing Malaysia’s economy in 2023. One major risk is the potential for external factors to weigh on the country’s growth prospects. Malaysia is a small, open economy that is heavily reliant on trade, particularly with China. Any slowdown in global growth or disruptions to trade flows could have a significant impact on Malaysia’s economy.

Another risk is the potential for inflation to rise faster than expected. Inflation is expected to average between 2.8% and 3.8% in 2023, compared to 3.3% in 2022. However, this forecast is highly uncertain and there are several factors that could cause inflation to rise faster than expected. These include geopolitical tensions, extreme weather events, and higher input costs due to developments in global financial markets.

Malaysia’s economy is also facing domestic challenges, including rising living costs and input costs. Higher-than-expected inflation could erode consumers’ purchasing power, while rising input costs could eat into businesses’ profits. These factors could dampen domestic demand and weigh on Malaysia’s economic growth.

Malaysia’s economy is expected to grow between 4.0% and 5.0% in 2023, according to Bank Negara Malaysia. While this forecast represents a moderation from the country’s 8.7% growth in 2022, there are still significant risks facing Malaysia’s economy, particularly on the external front.

However, there are also potential upside risks, including improving labor-market conditions, stronger tourism activity, and the implementation of government projects.

The outlook for Malaysia’s economy in 2023 remains uncertain, and policymakers will need to remain vigilant and flexible in order to respond to changing economic conditions.

Aaron Chan

Aaron Chan is a seasoned journalist who serves as Asia's correspondent for GE63. With a wealth of experience in the region, Chan has a keen eye for the latest developments and trends in Asia's dynamic and rapidly evolving economies. His reporting offers valuable insights into the economic, social, and political changes that are shaping the future of the region.

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