KUALA LUMPUR, Oct 18 – Consumer spending in Malaysia is expected to increase by 5.0 per cent to a pre-Covid-19 pandemic levels, but high household debt levels may limit this growth, according to a report by research firm BMI.

The report by the Fitch Solutions company said that since the ringgit is expected to rise to RM3.80 to the dollar, cheaper imports may provide Malaysian consumers with access to cheaper goods and greater purchasing power in key sectors.

"Spending will be constrained by an environment of high debt levels, and its servicing costs.

"However, easing inflation and a tight labour market will support spending, as real wage growth returns to positive territory, supporting purchasing power over the year.”

BMI said spending will rise to RM952.6 billion in 2025 based on 2010 prices.

During the 2015 to 2019 period prior to Covid-19, household spending had grown at an average rate of 5.2 per cent.

"Malaysia remains heavily reliant on imports to meet local demand and the strengthening of the exchange rate will mean that Malaysian consumers will benefit from cheaper imports.

"We believe that this backdrop will result in consumer spending over 2025 remaining stable,” it added.

However, consumer confidence has been declining, with the latest data showing a drop to 87.1 in the first quarter of 2024, which is one of the lowest levels recorded since 2022.

Despite the lower confidence, retail sales in Malaysia remained stable, growing by 5.9 per cent year-on-year in August 2024, although this marks the fourth consecutive month of slowing sales.

A key risk to the economic outlook is the high household debt, which stood at 68.5 per cent of gross domestic product (GDP) in the third quarter of 2023, limiting future borrowing capacity.

Debt servicing costs are expected to rise further as interest rates remain elevated, forcing consumers to allocate more of their income towards debt repayment.

It said this is due to Malaysia seeing a household credit boom in recent years, and a rapid unwinding of this debt could affect consumer spending.

In comparison to other markets, Malaysia’s inflation outlook is relatively stable, averaging 2.2 per cent in 2025, according to the report.

The employment rate at 3.2 per cent in August 2024 was also the lowest since January 2020, which BMI said backed its positive consumer outlook.

Prime Minister Datuk Seri Anwar Ibrahim will table Budget 2025 this afternoon, as his administration seeks to balance lowering costs of living with falling revenue.