MAY 20 — The latest economic update for the first quarter of 2024 from Bank Negara Malaysia (BNM) with new, revised data from the Department of Statistics Malaysia (DOSM) provides reasons for optimism for the Malaysian economy in the coming year.

It is useful to break down the analysis in two steps. First, where we are and second where we are heading.

The forecasts for 4-5% growth in 2023 proved over-optimistic. The revised growth for last year at 3.6% was not even close to the potential of 4.5%. We had anticipated this in our previous article in mid-February, "The Big Surprise: Malaysia not back to normal.” In the last three quarters of the year GDP growth was flat at around 3% year-on-year.

The revised data reveal some methodological uncertainties due to an important redistribution of the value-added, which was reduced consistently in Q2 and Q3 and re-allocated into Q4. DOSM should try to explain this revision and improve the data so that we can understand how the economy was performing at the time rather than many months later.

If data are subject to heavy revisions like this, how should we interpret the Q1 data for this year? Although it is more optimistic, caution and uncertainties remain if it will be revised later.

A more detailed understanding of how the economy is performing can be obtained by looking at final aggregate demand which subtracts uncertainties due to statistical errors and changes in inventories. This allows us to see the underlying strength of the economy.

In the end, businesses make profits based on what has been sold in the market and not based on data subject to statistical errors or unexplainable changes in inventories.

The graph below compares the annual percentage change in final demand using the old data and the new revised data.

Malaysia final demand (% change from previous year)

The green line shows the average annual change in final demand in normal times during the pre-covid period and can be considered as the potential growth rate. The red line shows the contraction in final demand based on the old data and the blue line shows the contraction based on the revised data.

The data speaks for itself. Until the last quarter the economy was in free-fall, hitting only 0.4% annual growth in final demand. There was no reversion "back to normal” or trending to the potential. It does not even show any sign of stabilisation.

So since that is where we are, what about where we are heading? The latest data is interesting in terms of the future prospects of the economy.

Our previous analysis has emphasised the structural interpretation of the data in which the performance of investment is the key variable that signals a change in the cycle and a new phase of sustainable economic growth.

A good measure to look at is the ratio of fixed investment to gross domestic product (GDP). The latest Q1 2024 data show a consistent jump in this ratio, both at the aggregate level and when considering the components, especially machinery and equipment. This can be seen in private investment as well as total investment.

The figure below shows how the negative trend in the investment ratio was clear since 2015 and became more critical in the Covid-19 period. More recently this trend first stabilized and finally started to point up again especially in the new data for Q1 2024.

The performance of investment is by far the most important signal coming from the latest data. It means that the engine of the economy is starting to move on again and it supports our interpretation for a possible turning point of the business cycle if it can be maintained.

This improvement has not happened by chance and two factors in particular have contributed to this achievement. First, the clear policy of the Unity Government to support expansionary expenditure in public investment and infrastructure. Constant monitoring and implementation of this plan by government agencies like Mida and MOF has been extremely successful.

Second, the positive macroeconomic environment has delivered price stability and financial stability through joint efforts from the government and BNM which have provided moderate inflation, stable and low interest rates and a consistent flow of credit to the economy.

Malaysia fixed investment (% of GDP)

Uncertainties and risks in the current economic scenario are still present and suggest caution. The international economy is still in transition. In our view, geopolitical tensions can still have a negative effect on the energy price and weaknesses in the supply-chain can limit the performance of the economy.

Setting aside international uncertainties, there are also internal issues that are worth mention. The withdrawal option from EPF funds through the new Akaun Flexibel on one side offers support to private consumption but on the other side can create excess demand.

This combined with the possible subsidy rationalisation must be handled effectively to ensure the positive performance of the economy can continue.

Looking ahead, there are legitimate reasons for optimism. Policymakers in the government and BNM have made good decisions which should be recognised and acknowledged and have managed the delicate post-covid transition phase of economy in a positive way. Now they must monitor and weigh delicate choices on subsidy rationalisation, keeping in mind that there are risks and that a balanced, moderate and step-by-step approach could be wise.

*Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist and policy analyst. The views expressed are those of the writers.

**This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.