The Malaysian economy picked up momentum in 1Q2024, registering a 4.2% year-on-year (y-o-y) growth compared with the average of about 2.9% in the preceding three quarters, and higher than market expectations. Bank Negara Malaysia explained that the higher gross domestic product (GDP) growth was driven by stronger private expenditure and positive turnaround in exports. Advance estimates from the De- partment of Statistics Malaysia also paint a brighter outlook — forecasting growth at an even stronger 5.8% in 2Q2024. (By the time this article is published, we would also have the official 2Q2024 GDP growth figures, which were scheduled for release on Aug 16).
On the back of these better-than-expected numbers, most analysts and economists are upbeat on Malaysia’s economic outlook, supported by what is seen to be positive trends in the country’s reform and pro-growth policies. But oftentimes, headline numbers alone don’t tell the whole story — and relying on them can lead to wrong decisions with negative consequences. That being the case, we decided to deconstruct the GDP growth numbers and figure out what drove the Malaysian economy in the past few quarters. That should give us a better idea as to whether the improved headline statistics are on solid ground and, therefore, sustainable.
Let’s start with the facts. The quarterly GDP growth numbers have been uneven since the Covid-19 pandemic (see Chart 1). The economy contracted sharply at the outset of the pandemic, falling 16.9% y-o-y in 2Q2020. Growth stayed negative in 2H2020 and was volatile in subsequent quarters — for instance, rebounding 16.3% in 2Q2021 but contracting again in the next quarter (3Q2021) — due to the many phases of movement control orders and partial reopening of the economy. The pandemic also caused huge volatility in commodity and goods prices, the result of supply chain disruptions and uncoordinated economic reopening among countries in the world that was exacerbated by the Russia-Ukraine war. The cumulative impact of all the above complicates any simple y-o-y comparisons because of the big swings and base effects. And that muddies the economic picture.
For example, consumption and investments as well as exports all fell sharply in 2Q2020 with strict movement controls and border closures. This resulted in a low base for comparison, which then translated to the exceptionally strong y-o-y growth in 2Q2021. Similarly,during the recession in 2020, the economy contracted 5.5% for the full year, creating a low base effect that flattered the 3.3% rebound in 2021 and 8.7% growth in 2022, which came on the back of full economic reopening after the country shifted to the endemic phase of Covid-19. To get a clearer reading on the underlying economy, we took a deeper dive into the three biggest factors that were underpinning the economic recovery and quarterly GDP growth since 2021.
For one, we saw notable restocking in 2021-1Q2022 (the blue bar in Chart 1) as pandemic restrictions were gradually relaxed ahead of full reopening and supply chain disruptions eased. Positive changes in stocks boosted GDP recovery — but then took its toll in subsequent quarters, which registered negative y-o-y growth. The drag ended in 3Q2023 and that contributed to the improved headline GDP growth numbers in 4Q2023. Stock changes tend to be quite volatile quarter to quarter and do contribute to GDP swings. We also see this distortion in the US GDP quarterly growth numbers.
See also: Education lies in the heart of our nation’s problems and the pathway to our solution
Of greater importance are exports (the brown-coloured bar in Chart 1), which are a key driver for the Malaysian economy — especially oil and gas and, to a lesser extent, crude palm oil (CPO). Because Malaysia’s manufacturing has relatively low value added, rising manufacturing exports typically come in tandem with rising imports (of semi-finished goods) and, therefore, have a smaller net impact on the overall economy. Rising oil prices, on the other hand, have outsized effects on total export values and GDP growth, because the costs of oil and gas are fairly fixed (from the ground).
Chart 2 shows the positive impact of rising oil and gas prices — particularly in 2022 after Russia invaded Ukraine — on exports and economic growth. And the drag on GDP growth after prices peaked around 3Q2022-4Q2022 and started falling. Oil and gas prices bottomed out around mid-2023 and turned higher again, contributing to higher exports and the stronger GDP growth of 4.2% in 1Q2024. In short, there is a strong positive correlation between Malaysia’s GDP growth and oil and gas prices.
See also: The pendulum swings right: A pushback against liberal, progressive, interventionist economics
The biggest and most consistent driver for the Malaysian economy is private consumption. Prior to the pandemic, private consumption grew at a fairly robust and steady clip. The compounded annual growth rate between 2011 and 2019 was 7.1% on average trend (the grey line in Chart 3) — in excess of overall GDP growth (purple line) as well as real median wage (income) growth of 4.1% over the same period (after taking into account population growth). Although consumption has remained resilient, growth in recent quarters has been much slower than the pre-pandemic averages. This, even though real median wage has grown at a faster pace since then; for instance, up by 5.9% y-o-y in 1Q2024.
Granted, there could still be some distortions from the pandemic — for instance, pent up demand supercharging consumption in 2022 — that would have gradually tapered off into 2023, thereby resulting in slower y-o-y growth. But the chart does not paint a picture of robust consumption. Furthermore, the 2022 consumption boost was supported by the special withdrawal scheme from Employees Provident Fund (EPF) savings (in April-May 2022), which totalled a whopping RM45 billion.
This year, some 3.16 million EPF members (24.3% of total members under the age of 55) chose to withdraw a further RM7.8 billion from their Account 3 in the first six weeks after the restructuring of EPF accounts. We don’t know the reasons or motivations behind the latest withdrawals, or whether the additional cash in hand will boost consumption in 2Q2024 and 3Q2024. In fact, we are unsure why the EPF decided to restructure its accounts making it easier for members to withdraw savings, especially given its constant warnings that Malaysians do not have enough saved for old age.
Regardless, withdrawing retirement savings to pay for today’s consumption is never a positive sign — and clearly not sustainable.
Conclusion
For more stories about where money flows, click here for Capital Section
In summary, the stronger GDP growth in 1Q2024 was driven, in large part, by increased exports for oil and gas on the back of higher prices. Commodity prices, though, are determined in global markets, driven by external factors and can be volatile. In other words, they tell us very little about the strength of the domestic economy, which we think is better reflected in the private consumption numbers. And the data shows that private consumption growth has been slow relative to pre-pandemic average growth levels. (Note that the official 2Q2024 GDP growth numbers, released last Friday after this article was written, is expected to show slightly higher consumption growth of about 5.6% y-o-y, compared with 4.7% in 1Q2024. The pre-pandemic growth was 7.1%, on average. Nevertheless, we don’t think it will materially change our conclusion here).
Although real wage growth has recovered strongly post-pandemic, the real median wage (which fell during the pandemic) is not much higher than it was back in 2019 — and not where it would have been if the pandemic had not happened (based on the long-term growth trajectory) (see Chart 4). This explains why many people are feeling “poorer” today. Anecdotal evidence suggests that consumers are worse off following the sharp increase in costs in the last few years and many are struggling with the rising cost of living while raising, or even just maintaining, their living standards.
We have heard and read non-stop discussions of when the US Federal Reserve is going to start cutting interest rates — now almost certain in its next scheduled Federal Open Market Committee meeting in September — and more recently, by how much to support a slowing economy. By contrast, there has been very little debate on what Bank Negara would do when this happens. Almost all analysts and economists expect Bank Negara to keep the overnight policy rate unchanged — the rationale being that the resulting narrowing in interest rate differences between the US dollar and the ringgit will drive the ringgit’s appreciation, both a desired and desirable outcome. We think this rationale completely misses the point. We will explain why next week.
The Malaysian Portfolio recovered some of the previous week’s losses, gaining 1.7% for the week ended Aug 14. IOI Properties Group (+13.2%) and KSL Holdings (+9.9%) were the top gainers while Insas Bhd – Warrants C ended 2.1% lower. The portfolio underperformed the broader market recovery due in part to our high cash holdings (69% of total portfolio value). Total portfolio returns now stand at 199.1% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 11.9% over the same period, by a long, long way.
The Absolute Returns Portfolio gained 3.2% for the week, lifting total returns since inception to 4.3%. The biggest gainers were Swire Properties (+9.3%), Itochu (+6.8%) and DBS (+3.8%). Airbus was the only loser, down a marginal 0.1%. Shares for Swire rose after reporting 1H2024 revenue that was slightly above expectations. The company raised its interim dividend to 34 HK cents per share, from 33 HK cents per share in the previous corresponding period. It also announced a share buyback programme of up to HK$1.5 billion, underscoring confidence in its business and prospects. We have also adjusted our investment costs in DBS and OCBC after their shares went ex-entitlement for dividends.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
