Strong labour market conditions to support domestic demand: Bank Negara Malaysia

Continued employment and wage growth, particularly in the domestic-oriented sectors, are supporting household spending in Malaysia.

The Central Bank of Malaysia (Bank Negara Malaysia, or BNM) has said that for Q2 2023, growth of the Malaysian economy was impacted by slower external demand and a decline in commodity production. As such, it hopes growth will continue to be driven by resilient domestic expenditure - noting that the external environment remains challenging.

This, it said, while explaining that the global economy does continue to expand, driven by resilient domestic demand supported by strong labour market conditions. Global growth, however, remains weighed down because of factors such as:

• Persistently elevated core inflation and higher interest rates,
• Rotation of spending from goods to services, and the ongoing electrical and electronics (E&E) downcycle impacting global trade,
• Slower-than-expected growth in China,
• While core inflation in advanced economies is slowing down, it remains above historical averages.

As such, at its meeting on 7 September 2023, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3%. The statement added: "For most central banks, the monetary policy stance is likely to remain tight. The growth outlook remains subject to downside risks, mainly from a slower momentum in major economies, higher-than-anticipated inflation outturns, an escalation of geopolitical tensions, and a sharp tightening in financial market conditions."

BNM added: "At the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects."

Overall in Malaysia, BNM pointed out that continued employment and wage growth, particularly in the domestic-oriented sectors, continue to aid household spending. Other current and anticipated developments include:

• Tourist arrivals and spending expected to improve further,
• Investment activity to be supported by continued progress of multi-year infrastructure projects, and implementation of catalytic initiatives under the recently announced national master plans,
• Domestic financial conditions remaining conducive to financial intermediation amid sustained credit growth.

Meanwhile, in line with expectations, headline and core inflation have continued to ease amid the more moderate cost conditions. This moderating trend would likely continue in the second half of 2023, partly reflecting the higher base from the second half of 2022 and continued easing momentum of price increases. 

These factors, per the Central Bank, will continue to underpin the growth momentum going into 2024.

The authority added: "While the growth outlook is subject to downside risks stemming from weaker-than-expected external demand and larger and protracted declines in commodity production, upside risks mainly emanate from stronger-than-expected tourism activity, a stronger recovery from the E&E downcycle, and faster implementation of existing and new projects."

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Lead photo / BNM