Pronounced External Weakness In Q1 GDP: OCBC


Malaysia’s Q1 GDP growth of 5.6% YoY surprised on the upside versus 7.1% in Q4 said OCBC Lavanya Venkateswaran, Senior ASEAN Economist Treasury Research & Strategy Global Treasury of Oversea-Chinese Banking Corp Ltd, she adds the details, however, show that the weakness in the external sector was pronounced.


Mirroring this, the current account surplus shrank to MYR4.3bn (0.9% of GDP) in Q1 from MYR27.5bn (5.9% of GDP) in Q4. This external sector slowdown portends weaker growth for the rest of 2023. Hence, the bank said it maintains the 2023 GDP growth forecast of 4.4% YoY, with Bank Negara Malaysia likely to keep its policy rate unchanged for the rest of the year.


Q1 GDP growth of 5.6% YoY surprised expectations on the upside (Consensus and OCBC: 5.1%) versus 7.1% in Q4; OCBC said it had highlighted some upside risks following the strong March IP print. On a quarter-on-quarter seasonally adjusted basis, the economy grew 0.9% from -1.7% in Q4.

Pronounced External Demand Weakness

Notwithstanding the upside surprise, Lavanya said the weakness in the external sector was pronounced. Goods exports growth fell to -8.5% YoY from +3.3% in Q4 while contraction in goods imports was deeper at -10.7% YoY from +3.8% in Q4. As a result, net goods exports contributed 0.7 percentage points (pp) to headline GDP growth from a flat contribution in Q4. On the services side, tourism inflows helped support the net services export contribution at 1.4pp in Q1 (Q4: 1.5pp).


The weakness in import growth was broadly consistent with the narrower contribution of 4.3pp from domestic final demand versus 6.3pp in Q4. Within this, private consumption, government consumption and private investment slowed in Q1 while government investment spending remained supported by large public transportation and utility projects.


From the supply-side, growth slowed across all key sectors including agriculture, manufacturing, construction, and services. The bright spot was for sectors associated with motor vehicle manufacturing and services, which continued to grow in Q1 versus Q4 consistent with higher car sales for the quarter.


Reflected In The Shrinking Current Account Surplus

Mirroring the weakness in external demand, the Q1 current account surplus narrowed sharply to MYR4.3bn (0.9% of GDP) from MYR27.5bn (5.9% of GDP) in Q4. The goods trade surplus narrowed to MYR39.9bn from MYR57.7bn in Q4 while the deficits on the services and primary income accounts widened in Q1 versus Q4.


Meanwhile, the deficit on the financial account widened to MYR2.4bn from MYR1.1bn in Q4 as net portfolio outflows (MYR33.3bn from MYR26.7bn in Q4) intensified. This more than offset net FDI inflows of MYR10.9bn compared to an outflow of MYR9.3bn in Q4. The surplus on net ‘other investments’ narrowed to MYR20.9bn from MYR36.6bn in Q4.


GDP Growth Set To Weaken Further

The weakness in Q1 goods exports portends further weakness for the Malaysian economy for rest of 2023 as the economic recovery in main trading partners remains constrained by still tight monetary policy and elevated domestic interest rates. We expect some knock-on impact from weaker external demand onto domestic demand, particularly investment spending, while consumption expenditures moderate.

As such, OCBC said it maintains the 2023 GDP growth forecast of 4.4%, implying a sharper slowdown for the rest of the year but still within BNM’s 4-5% forecast range. The regional bank, however, expects the 2023 current account surplus to narrow to 2.4% of GDP from 3.1% in 2022, slightly below BNM’s 2.5-3.5% of GDP range.


In terms of monetary policy implications, with growth and inflation slowing, it expects BNM to keep policy rates unchanged at 3.00% for the rest of 2023.