The economy grew by 3% in the fourth quarter
The Malaysian economy expanded by 3% in the fourth quarter of 2023 (3Q 2023: 3.3%; 2Q 2023: 2.9%). Household spending remained supported by improving labour market conditions and easing cost pressures. The unemployment rate declined to the pre-pandemic level of 3.3% while the labour force participation rate was at a historic high in 2023. Meanwhile, growth in investment activity was underpinned by the progressive realisation of multi-year projects and capacity expansion by firms. Exports, however, remained subdued due to prolonged weakness in external demand amid stronger imports. On the supply side, there was a broad-based expansion. The commodities sector grew. This was supported by higher oil and gas production as well as expansion in the agriculture sector amid improved labour supply. The services and construction sectors continued to expand. The manufacturing sector remained soft from continued weakness in the electrical and electronics industry. In terms of monthly GDP, December recorded a growth of 1.4%, lower than November (3.8%) and October (3.9%), attributed mainly to the shorter school holiday period during the month and weaker export-oriented manufacturing sector. On a quarter-on-quarter seasonally-adjusted basis, the economy contracted by 2.1% (3Q 2023: +2.6%).

Overall, the 2023 growth for the Malaysian economy normalised to 3.7%, following a strong growth registered in the previous year (2022: 8.7%). Growth moderated amid a challenging external environment. This was due mainly to slower global trade, the global tech downcycle, geopolitical tensions and tighter monetary policies. On the domestic front, despite the lapse of large policy support provided as the economy started to open up in 2022, the continued recovery in economic activity and labour market conditions supported growth in 2023. In addition, the solid growth performance of the economy is reinforced by a resilient external position. Despite the challenging external environment, the current account surplus for the year 2023 was sustained at 1.2% of GDP, supported by a diversified export structure across market and product. The strength in external position is also reflected in the external debt, which declined to 68.2% of GDP in 2023 (3Q 2023: 69%), and a higher net international investment position at 6.6% of GDP in 2023 (3Q 2023: 5.2%). Importantly, the external debt remains manageable given the favourable maturity and currency profiles. One-third of the external debt is denominated in ringgit, limiting currency risk, while around 70% of debt have medium and longer-term tenures. Foreign currency borrowings are also subject to Bank Negara Malaysia (BNM)’s prudential requirements and continue to consist mainly of concessionary intragroup loans.

Headline inflation continued to decline to 1.6% during the quarter (3Q 2023: 2%). The downward trend was contributed by the moderation in fresh food inflation (4Q 2023: 0.5%; 3Q 2023: 1.9%) and core inflation (2%; 3Q 2023: 2.5%). The lower core inflation was largely driven by an easing in services sub-segments, including food away from home and repair and maintenance of personal transport. Inflation pervasiveness continued to trend lower, as the share of Consumer Price Index items recording monthly price increases moderated to 36.3% during the quarter (3Q 2023: 40.8%). This brought inflation pervasiveness below its fourth quarter long-term average (2011-2019) of 41.7%. For 2023 as a whole, headline inflation declined to 2.5% (2022: 3.3%) while core inflation averaged at 3% (2022: 3%).

Exchange rate developments
Domestic financial markets continued to be driven by evolving financial market expectations over the global monetary policy path. In particular, financial market participants viewed that the US policy rate had already peaked and that the US Federal Reserve will start reducing the policy rate in 2024 amid the ongoing disinflation.

Against this backdrop, the ringgit appreciated by 2.1% against the US dollar in the fourth quarter of 2023, in line with regional currencies following a broad-based depreciation in the US dollar. Malaysia’s external position also remains supportive of inflows. BNM will continue to ensure sufficient liquidity to support the orderly functioning of the domestic foreign exchange market.

Financing conditions
Credit to the private non-financial sector expanded by 4.7% (3Q 2023: 4.3%), driven by higher growth in business loans (3.6%; 3Q 2023: 1.9%) while outstanding corporate bonds growth moderated to 4.2% (3Q 2023: 5%). The higher business loan growth was driven mainly by higher growth in working capital loans. Of note, SME loan growth remained forthcoming (8.2%; 3Q 2023: 7%). For households, outstanding loan growth remained steady at 5.6% (3Q 2023: 5.4%), reflecting sustained growth across key purposes.

Moving forward, Malaysia’s growth to improve due to resilient domestic expenditure and recovery in external demand
Growth in 2024 will be driven by resilient domestic expenditure and improvement in external demand. On the external front, the IMF is projecting a rebound in global trade growth from 0.4% in 2023 to 3.3% in 2024. Together with the tech upcycle, the stronger external demand and continued improvement in the tourism sector will provide support to Malaysia’s exports. On the domestic front, household spending will be supported by continued employment and wage growth. Investment activity will be underpinned by further progress of multi-year projects, by both the private and public sectors, as well as the implementation of catalytic initiatives under the various national master plans. Improvement in tourist arrivals and spending are expected to continue. The growth outlook remains subject to downside risks stemming from weaker-than-expected external demand and larger declines in commodity production. Nonetheless, there are upside risks to growth emanating from greater spillover from the tech upcycle, stronger-than-expected tourism activity and faster implementation of existing and new projects.

Headline and core inflation to remain modest in 2024
Both headline and core inflation have moderated due mainly to lower cost pressures amid stabilising demand conditions. In 2024, inflation is expected to remain modest, broadly reflecting stable cost and demand conditions. However, inflation outlook remains highly subject to changes to domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments.

BNM will publish its Annual Report 2023, the Economic and Monetary Review 2023, and the Financial Stability Review for the Second Half of 2023 on 20 March 2024.