Malaysia posts weakest GDP growth in nearly 2 years as exports slump

A view of Kuala Lumpur’s skyline in Malaysia May 30, 2023. REUTERS/Hasnoor Hussain/File photo

KUALA LUMPUR  -Malaysia’s economic growth hit the lowest in nearly two years in the second quarter due to sliding exports and a global slowdown.

This prompted the central bank on Friday to warn that full-year growth would come in at the lower end of its previous forecast.

The weaker outlook does not change most economists’ expectations for Malaysia’s  central bank to keep policy rates on hold this year as the Southeast Asian economy confronts weakening global demand and a slowdown in main trading partner China.

Second-quarter annual growth came in at 2.9 percent, central bank data showed. The expansion was the slowest pace since the third quarter of 2021 when the economy contracted by 4.2 percent, and was lower than the 5.6 percent growth in the first quarter of the year.

Economists surveyed by Reuters had forecast gross domestic product growth at 3.3 percent in the April to June period.

Bank Negara Malaysia also said full-year economic expansion will come in at the lower end of the 4 percent to 5 percent range it had forecast earlier, though some economists predict the target will be hard to reach as domestic demand slows as well.

“The weak external demand is expected to weigh on near-term growth. The economy is facing downside risks stemming from weaker-than-expected global growth, and a deeper or longer-than-expected technology downcycle,” Governor Abdul Rasheed Ghaffour told a news conference.

While he does not expect a worldwide recession, the governor said global growth will be below the long-term average.

Malaysia, one of the world’s biggest exporters of palm oil and liquefied natural gas, could also take a hit on commodity production due to El Nino and prolonged plant maintenance, Abdul Rasheed said.

Improving tourist arrivals and faster implementation of domestic projects could provide some upside, he added.

Other data on Friday showed Malaysia’s exports in July slumped 13.1 percent from a year earlier, worse than economists forecasts for an 11.3 percent drop. Imports also fell more than expected.

Mohd Afzanizam Abdul Rashid at Bank Muamalat Malaysia said the economic and trade data showed how susceptible the economy was to the global slowdown.

Malaysian consumers are also likely to be cautious in their spending going forward, leading to slower economic growth in the second half, he said.

“In that sense, risks that GDP might grow below 4 percent to 5 percent projected growth is quite high,” Mohd Afzanizam said.

Alex Holmes, senior economist at Oxford Economics, said the government’s 4-5 percent growth forecast looks unattainable, removing any appetite for rate hikes and even creates a chance for cuts.

“Domestic demand is set to struggle for momentum, as weak exports flow through to business earnings and weigh on investment, hiring and wage growth,” Holmes said.

Malaysia is also facing some outflow pressure from the ringgit, the worst-performing currency in the region this year. BNM has said it would intervene in the foreign exchange markets to stabilize the ringgit, which has dropped more than 5 percent against the U.S. dollar this year.

The currency gained 0.2 percent on Friday despite the weak data.

The central bank last month kept benchmark interest rates unchanged due to moderating growth and easing inflation, with economists saying it will likely stay on hold for the rest of the year.

On Friday, the central bank said while cost pressures have eased, headline and core inflation will moderate further in the second half partly due to a higher comparative base last year.