Malaysia’s economy continues to show resilience and growth, with a stronger-than-expected performance in the second quarter of 2024 (2Q2024) prompting economists to revise their forecasts upward for the country’s gross domestic product (GDP) growth this year. The economic expansion is largely attributed to robust domestic spending, investment activity, and a notable recovery in the tourism sector.
Revised Growth Forecasts: A Positive Outlook
Several research houses have adjusted their GDP growth projections for Malaysia, reflecting the country’s continued economic momentum. BMI, a unit of the Fitch Group, has raised its GDP growth forecast for 2024 from 4.4% to 4.7%. Meanwhile, MIDF Research and OCBC Global Markets Research have both revised their forecasts to 5.0%, up from 4.7% and 4.2%, respectively.
BMI noted that the 5.9% year-on-year (y-o-y) growth recorded in 2Q2024, which is the fastest pace in six quarters, exceeded expectations and set the tone for an upward revision. The research unit’s updated forecast now falls within the upper bound of the Malaysian government’s official forecast range of 4.0% to 5.0% for 2024.
Drivers of Economic Growth
The robust economic growth in 2Q2024 was driven by several key factors:
- Increased Domestic Spending: Both business and consumer spending have surged, supported by improved economic conditions within the country. Government initiatives, such as cash assistance programs and the flexibility of withdrawals from the Employee Provident Fund (EPF) Account 3, have further bolstered consumer spending. These measures are expected to mitigate the potential inflationary impacts of subsidy rationalization and other policy adjustments.
- Tourism Sector Recovery: The ongoing recovery in the tourism sector has significantly contributed to domestic consumption. The increase in foreign tourist arrivals has positively impacted industries such as accommodation, transport services, food and beverage, and retail trade. As Malaysia continues to attract more tourists, these sectors are expected to further boost the economy.
- Sectoral Growth: MIDF Research projects strong growth across various sectors, including manufacturing (4.4%), construction (9.8%), agriculture (2.9%), and mining (3.5%). These sectors are benefiting from increased demand, ongoing infrastructure projects, and improved production conditions.
Investment and Export Growth
Investment activity remains a crucial driver of Malaysia’s economic growth. Public Investment Bank highlights that the ongoing execution of multi-year projects in both the private and public sectors is expected to sustain the momentum of growth in the coming quarters. These projects, coupled with rising demand for data centers and strong tourism activity, are likely to underpin higher fixed capital investments.
On the export front, Malaysia’s performance is expected to continue improving in the second half of 2024. MIDF Research points to steady demand for commodities such as palm oil, liquefied natural gas, and petroleum products, as well as ongoing growth in electrical and electronics (E&E) exports. Public Investment Bank echoes this sentiment, noting that the global tech upcycle and increased tourist arrivals will further bolster export growth.
Potential Risks and Upside Opportunities
Despite the positive outlook, economists caution that the growth trajectory could face challenges from weaker-than-expected external demand, potential geopolitical conflicts, and lower-than-anticipated commodity production. These factors could temper the overall growth rate if not managed effectively.
However, there are also potential upside opportunities that could enhance Malaysia’s economic prospects. Public Investment Bank highlights the possibility of stronger spillovers from the global tech upcycle, a more robust recovery in tourism, and accelerated implementation of investment projects. These factors could collectively provide a significant boost to the economy in the coming quarters.
Impact of Civil Servant Salary Hikes on GDP
Another factor contributing to Malaysia’s economic growth is the recently announced public service compensation scheme. BIMB Securities Research estimates that the RM10 billion fiscal injection resulting from the new salary scheme for the country’s 1.6 million civil servants could boost Malaysia’s GDP by 0.6%.
Starting in December 2024, mid-level civil servants will receive a 15% salary increase, while top-level civil servants will see a 7% raise. The policy, which is set to be implemented in two phases (Dec 1, 2024, and Jan 1, 2026), aims to alleviate the financial burden of civil servants and is expected to contribute to increased domestic consumption.
Conclusion
Malaysia’s stronger-than-expected economic performance in 2Q2024 has led to upward revisions in GDP growth forecasts for the year. Driven by robust domestic spending, a recovering tourism sector, and strong investment activity, the country is well-positioned to achieve significant economic growth in 2024. While there are potential risks that could temper this growth, the overall outlook remains positive, with several upside opportunities that could further enhance Malaysia’s economic prospects.
