economy

AMRO forecasts Malaysia's growth to accelerate to 4.9pc next year

KUALA LUMPUR: Malaysia's growth momentum is expected to continue for the rest of this year and in 2025, driven by resilient domestic demand and a rebound in external demand, according to the ASEAN+3 Macroeconomic Research Office (AMRO).

In its 2024 Annual Consultation Report, AMRO projected Malaysia's growth to accelerate to 4.7 per cent in 2024 and 4.9 per cent in 2025, bolstered by strong domestic consumption and an improving export landscape amid a global technology upcycle.

While inflation has moderated, it remains vulnerable to upward pressures from fuel subsidy rationalisation. 

The report advised that authorities should be ready to tighten monetary policy to mitigate any second-round inflation effects resulting from fuel price adjustments. Additionally, restoring medium-term fiscal space, increasing foreign reserves, and expediting structural reforms will enhance economic resilience and potential growth.

The report, based on AMRO's Annual Consultation Visit to Malaysia in July 2024 and data available up to August 16, noted that the unemployment rate has returned to pre-pandemic levels, with labour force participation reaching a record high. 

The policy rate has remained unchanged since May 2023, reflecting easing inflation and improving demand conditions. Both headline and core inflation have consistently declined in 2023, while a gradual rollout of planned subsidy rationalisation is underway.

Following the successful floating of diesel prices in June, focus has now shifted to the anticipated subsidy rationalisation of RON95 fuel. The potential inflationary impact will depend on how and when these adjustments are implemented.

The report also indicated that the fiscal deficit could narrow further this year and in 2025; however, reaching the government's medium-term deficit target of 3.5% of GDP will be challenging without new revenue measures.

AMRO assessed the risks to the growth outlook as broadly balanced in the near term, identifying downside risks from weaker-than-expected growth in major economies and potential adverse effects from the U.S. presidential election. 

Conversely, faster implementation of investment projects could provide a boost to growth. Key risks for inflation include commodity price shocks and uncertainty surrounding the timing and extent of RON95 subsidy rationalisation.

In the medium term, rising tensions between the U.S. and China could lead to global economic fragmentation, affecting Malaysia's trade and investment. Other challenges include a shortage of skilled labour, insufficient retirement savings in an ageing population, and low preparedness for natural disasters and climate change.

The report recommends a data-driven approach to monetary policy calibration, suggesting that the emergence of second-round inflation effects from fuel subsidy rationalisation would necessitate tightening monetary policy. 

"Although exchange rate flexibility should be maintained as a shock absorber, foreign exchange interventions may be needed in the event of excessive volatility. Strong external buffers are required for such interventions to be effective," it said. 

It added the government's continued fiscal consolidation should be supported by subsidy rationalisation and tax reforms. 

A phased implementation of RON95 subsidy rationalisation with effective communication is recommended to avoid a large inflation shock and allow for policy impact assessment. 

"To achieve the medium-term fiscal target, the government should consider reintroducing the goods and services tax after the full implementation of e-invoicing. 

"Following the enactment of the Public Finance and Fiscal Responsibility Act, the planned government procurement act should be expedited to further strengthen governance, accountability, and transparency," it said.

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