Malaysia’s Economic Outlook 2023: Expansion or Recession?

Is Malaysia prepared for what's to come in 2023? We take a deep dive into the country's economic outlook and assess the potential risks (and rewards).

After over two years of grappling with the pandemic that has disrupted and shifted lives globally, the world, it seems, has finally eased out of its grip. However, the impression it has left, alongside those made by the Russia-Ukraine conflict, supply chain disruptions, and political instability remain hurdles in the global economy's road to recovery. To rub salt into the wound, many economists believe that a global recession is imminent, with its arrival set for 2023. 

According to the International Monetary Fund (IMF) and the World Bank, a global recession is a period of economic contraction across countries, accompanied by a decline in industrial production, trade, capital flows, oil consumption, and unemployment. But despite its name, a global recession is not felt the same throughout the world, with some regions feeling the pressure more acutely than others. There is the Middle East, North Africa, and South Asia, which, global recession regardless, are forecasted for moderate to strong economic growth. Then, there is Europe and the United States for weaker economic growth. It thus begs the question, what about Malaysia?  

Malaysia’s Economic Growth Forecast

With the central bank forecasting economic growth between 4% and 5% in 2023, Malaysia is expected to dodge a recession. But despite the positive economic outlook, policymakers must remain vigilant against risks that could tip us into recession. 

The Spillover Effects of the Russia-Ukraine Conflict

Tensions that had been simmering for decades between Russia and Ukraine rose to a boiling point on 24 February 2022 when Russia invaded and occupied the contested regions of Ukraine. While the conflict is contained to the two countries, its spillover effects are not. Among the countries affected is Malaysia, which is experiencing the rising prices of goods and services, particularly food and oil. In this inflationary environment, the cost of living would increase while purchasing power would decrease, leading to a decline in domestic consumption. And as a driver of economic growth, lower domestic consumption equals slower economic growth. 

While the conflict has had observable effects since 2022, its potential escalation as a Black Swan event could have a more devastating impact on the Malaysian economy. Black swans, like the pandemic, could send oil and gas prices soaring but global stock markets crashing, further fuelling inflation. 

On the other hand, Malaysia is one of the few countries that could benefit from the increase in oil prices. As the world's second-largest producer and exporter of palm oil after Indonesia, Malaysia accounts for 17% to 19% of global trade. Hence, when the price of crude palm oil rose to an all-time high of RM8,076.50 per tonne in March 2022, the Malaysian Oil and Gas (O&G) industry benefitted handsomely. 

The Cost of Fighting Inflation

The Malaysian government has always provided subsidies, aid, and incentives like Bantuan Keluarga Malaysia to help mitigate the impact of inflation on its citizens. However, the increased allocation of funds towards these fiscal policies in 2020 and 2021 has amounted to a RM21.1 billion budget deficit and a 70.6% debt-to-GDP ratio in the third quarter of 2022. Therefore, experts anticipate that while the government would continue with these policies in 2023, it would do so at a lower amount or reduced frequency to minimise its fiscal burden. For monetary policies, experts predict that the central bank would raise the overnight policy rate (OPR) further in 2023 from 2.75% in 2022 to achieve price stability and thus relieve inflationary pressures. These contractionary fiscal and monetary policies used by the government to fight inflation and its impacts could contribute to a weaker economic outlook for the country. 

The Sway of Political Stability

Since taking office in 2022, Malaysia's Prime Minister and Minister of Finance, Dato' Seri Anwar Ibrahim, has made significant strides to prioritise political stability. Analysts commended his efforts to call for a vote of confidence and establish a unity government secretariat, among others, as strengthening his administration. This stability is crucial for attracting domestic and foreign investors, which, in turn, can affect economic growth. To encourage high-impact investments and foreign direct investment (FDI), the Anwar-led unity government has also introduced relocation incentives targeted towards the electrical and electronic (E&E) and aerospace sectors. However, the success of these efforts in driving economic growth is yet to be determined.

The ‘Risks’ That Lead to Neutral Growth

Expansion or recession? The answer is neither. While many believe that risks can only lead to expansion or recession, they can also pave the way for neutral growth. Neutral growth refers to steady and sustainable economic growth without causing inflationary or deflationary pressures. Several factors, such as weak global demand, political instability, and Black Swans, can limit an economy's growth potential and lead to neutral growth. In response to these challenges, policymakers have implemented neutral policies to prevent Malaysia's economy from slipping into recession. These policies include minimising fiscal burden, maintaining price stability, and promoting political stability. Moreover, Malaysia's strategic location and abundant natural resources enable it to mitigate extensive damages caused by the global environment, with only minor impacts expected. Overall, the outlook for Malaysia's economy in 2023 is neutral growth.

Afrina Arfa is currently pursuing a Bachelor of Finance and Economics (Honours) at Taylor's University. She spends her time indulging in economical news, hoping to inspire others to think beyond the constraints of society.