KUALA LUMPUR (April 13): Malaysia is unlikely to fall into a recession, despite a slow start in the first quarter of this year (1Q2023), due to weaker exports and normalisation of domestic demand, according to the Socio-Economic Research Centre (SERC). 

"We do not see Malaysia slipping into a recession, we just see slower growth [in the country's economy], as inflation and cost of living pressures continue to weigh on domestic spending," said the research institute's executive director Lee Heng Guie. 

"But there is a risk if consumer spending slows sharply," Lee told reporters on Thursday (April 13). 

SERC’s preliminary estimate of Malaysia’s economic growth, as measured by gross domestic product (GDP), is 4% to 4.5% in 1Q2023, compared with 5% in 1Q2022 and 7% in 4Q2022.  

According to Lee, the country’s exports continued to show slow momentum, reflecting the dampening effects of weaker global demand, easing prices of energy and commodities, and high-base effects. 

“The external trade sector is a drag on the economy, due to a sharp pullback in export growth. Festive demand will fuel private consumption, but increased prices and cost of living pressures as well as higher interest rates (higher debt service payment) will reduce net disposable income, and hence discretionary spending,” he explained.  

Meanwhile, for 2023, the research institute maintained its growth forecast for the country’s GDP at 4.1%, while headline inflation is expected to rise 2.8% to 3.5% (from 3.3% in 2022). 

“Inflation will remain elevated in the months ahead. Both cost and demand pressures have reinforced each other on prices, though wage bargaining is limited amid a relatively tight labour market. The wild card is the change in domestic policy on subsidies,” he noted.  

In addition, Lee said, Bank Negara Malaysia will likely raise the overnight policy rate (OPR) by 25 basis points (bps) to 3% from 2.75%. 

Last month, the central bank maintained its OPR at 2.75% for the second consecutive time, after four straight hikes last year by a cumulative 100 bps to tame inflation.  

“We are in line with the market consensus that another round (a 25 bps OPR increase) is coming. We need to watch to see if there are changes in the fuel subsidy scheme, if there is a shock from an unexpected event like the collapse of two global banks [recently], and so on," he added. 

The US Federal Reserve (Fed) raised interest rates by 25 bps to 4.75% to 5% in March — compared with a 50 bps hike previously — despite the recent collapse of Silicon Valley Bank and Credit Suisse. 

“Forward guidance grew more dovish, with the Fed stating that some additional policy firming may be appropriate. Market consensus is for the upper bound of the target range to peak at around 5.25% in the first half of 2023,” Lee added.