KUALA LUMPUR (Jan 19): Real household spending in Malaysia is expected to grow by 5% year-on-year (y-o-y) in 2023 to reach RM1.1 trillion, slowing down from 11.8% y-o-y growth in 2022, as recovery effects fade and growth returns to a new normal trajectory similar to that of pre-pandemic figures, said Fitch Solutions.
“We also note that households and businesses have already begun to draw down on their savings considerably since April 2022.
“As such, the surge in aggregate demand that drove growth in 2022 is unlikely to be sustained over 2023. Easing inflationary pressures will support consumer spending. However, a potential scale back of subsidies and price controls by the newly elected government will put pressure on consumer spending patterns going forward,” it said in a note on Thursday (Jan 19).
The research house said high-frequency data indicates steady growth in consumer confidence while the latest retail sales data suggests that there is a slight slowdown.
Nonetheless, consumer confidence has largely been steady, reflecting a positive consumer mindset despite inflationary pressures in certain commodities such as food and fuel weighing on low- and middle-income households.
Fitch Solutions cited fourth quarter of 2022 data where consumer confidence averaged around 100%, improving from an average of 98.45% in 2022.
It noted that retail sales in Malaysia has been slowing down since June 2022, albeit remaining in positive territory, reaching a rate of 22.8% y-o-y in November 2022.
“The slowdown is due to base effects resulting from pent-up demand following the lifting of Covid-19 restrictions. Inflation, however, has also increased over the same period," it added.
Fitch Solutions forecasts the Malaysian economy to grow by 4.0% y-o-y in 2023, slowing from 8.4% y-o-y in 2022, on the back of high private final consumption and domestic demand.
“We note that tightening credit conditions and continued supply chain disruptions, as well as the global downtrend in the semiconductor industry, could threaten growth over the forecast period. The recovery of the tourism sector, especially as China reopens for travel, should provide some offset,” it added.
The research house’s economic growth forecast is aided by steady employment and falling consumer price inflation.
It said the headline inflation has remained relatively benign in Malaysia, mainly a result of government intervention, through subsidies and price controls, which it expects to be lifted or narrowed during the course of 2023.
To rein in inflation, economists are expecting Bank Negara Malaysia (BNM) to increase the overnight policy rate by as much as 50 basis points this year.
However, Fitch said, rising debt servicing cost, as a result of increased interest rates, may impact growth.
"This means that households will increasingly have to allocate disposable income towards debt financing, placing downward pressure on consumer spending going forward,” it said. According to BNM, household debt stood at 84.5% of gross domestic product, one of the highest rates in the region.
Meanwhile, it said risks to its outlook include increased inflation and a continuation of the Russia-Ukraine conflict, which will lead to increased commodity prices.
Another risk is any reduction in government food and fuel subsidies will also weigh on household budgets amid weakening consumer purchasing power.