Malaysia Economic Forecast

After disappointing market expectations in Q2 and slowing from Q1, annual GDP is likely rising at a similar pace in Q3. Industrial output rebounded year on year in July from Q2’s slump on recovering mining activity. Meanwhile, a lower unemployment rate and softer inflation in July compared to Q2 likely cushioned household spending. Less positively, merchandise exports fell at a steeper annual pace in July. In the same month, retail sales rose less compared to Q2, and the merchandise import downturn deepened, foreshadowing cooling domestic demand. In other news, in September, Malaysia unveiled plans to ban exports of rare earths (RE)—used in semiconductors, electric vehicles and military equipment. The decision, which will likely have a limited impact on the domestic RE industry and GDP, could discourage foreign investment in Malaysia ahead and trigger export curbs from other countries.

Inflation fell to 2.0% in July (June: 2.4%) on weaker price pressures for food and falling transport prices. In H2, the headline rate will average below H1’s figure and within the Central Bank’s 2.0–3.0% target range on elevated interest rates, softer activity growth and state subsidies. That said, the onset of El Niño poses an upside risk to food prices later this year.