KUALA LUMPUR: OCBC Bank expects Malaysia's economy to grow 4.4 per cent this year, with the momentum staying moderate for the remaining quarters.
This is based on the healthy growth pace recorded in the first quarter of 2023 (1Q23), supported by resilient domestic demand.
OCBC chief economist Selena Ling and economist Lavanya Venkateswaran said the momentum will continue to slow in the second half of 2023 (2H23) as the external economic headwinds intensify.
"We expect gross domestic product (GDP) growth to slow to 4.1 per cent year-on-year from 2Q to 4Q23.
"The main drag on growth will be from goods exports, reflective not only of weaker external demand, but also fading commodity price tailwinds and a prolonged downturn in the global semiconductor cycle," they said.
OCBC thinks Malaysia's domestic demand will moderate in 2H23 and in 2024.
The bank said with the slowdown of manufacturing output, wage growth will possibly stay moderate and consequently weigh on private consumption.
Going into 2H23, OCBC said investor sentiment is expected to remain cautious, followed by the sharp depreciation in ringgit as well as fading commodity tailwinds.
On public sector's growth support, OCBC said it will be limited by the government's fiscal consolidation agenda.
The government, it added, is on track to achieve the fiscal deficit target of 5.0 per cent of GDP in 2023 from 5.6 per cent in 2022.
This is underpinned by higher revenues collections and lower subsidy and social assistance spending.
"The government has indicated its intention to follow through with the implementation of a targeted subsidy mechanism on electricity and retail fuel, which will create fiscal space to focus on infrastructure spending and other development priorities.
"This, however, leaves room for pipeline inflationary pressures. Our baseline for headline inflation is to ease to 2.9 per cent y-o-y in 2023 from 3.4 per cent in 2022, while core inflation remains unchanged at 3.0 per cent this year," Long and Venkateswaran said.
This is within Bank Negara Malaysia's 2.8-3.8 per cent forecast range for this year for headline and core inflation, they added.
The bank also expects Bank Negara to maintain a clear hawkish bias into 2H23, as the stickiness in core inflation is a key concern for it.
Nonetheless, the central bank might increase its key interest rate by 25 basis points later this year, if the US Federal Reserve is more hawkish than OCBC's headline forecast.
As for the ringgit, OCBC said the underperformance of the currency is due to multiple factors and will continue to stay under pressure in the near-term.
This includes renminbi depreciation, resurgence in US dollar strength, higher US Treasury yields and broad softness in oil prices.
"Our forecast for US dollar-ringgit is 4.5 by end-2023 and 4.4 by end-2024," OCBC said.
On commodity, OCBC expects oil prices to rebound in 2H23 as accumulated oil stocks began to wear down and the market shifts to a physical deficit situation.
"For the rest of this year, we expect the supply of palm oil to normalise as labour shortages in Malaysia's CPO sector ease. That said, El Nino-associated risks warrant close attention," it added.
