OECD Economic Outlook, Volume 2024 Issue 1

Malaysia

GDP is projected to grow by 3.9% in 2024 and 4.8% in 2025. After a weak patch in late 2023, private consumption is expected to be robust due to continued improvements in the labour market, lower inflation, and government cash transfers. Investment is projected to continue to grow steadily, supported by multi‑year infrastructure projects. International tourist arrivals have returned to the pre-pandemic level, which will continue to sustain exports. However, weaker external demand for goods, could reduce export prospects.

Government debt has increased rapidly and fiscal consolidation will be required to rebuild fiscal space, including by mobilising more tax revenues and phasing out subsidies for fuel and electricity, while strengthening support to vulnerable groups. The neutral monetary policy stance should continue as inflation is projected to remain modest. Substantial gender gaps are holding back economic opportunities for women, which could be addressed by investing more into childcare support and promoting workplace flexibility. Reducing skill mismatches could boost both growth and social inclusion.

Economic activity has moderated

Real GDP fell by 2.1% in the fourth quarter of 2023 on a seasonally adjusted quarter‑on‑quarter basis, mainly driven by a strong decline in private consumption. This reduced annual GDP growth to 3.7%, significantly short of market expectations. Headline inflation continued to moderate from 4.7% in August 2022 to 1.8% in February 2024, and core inflation also declined to 1.8%. The unemployment rate returned to its pre-pandemic level of 3.3% in January 2024. Monthly short-term indicators, such as the leading indicator of the Department of Statistics, and industrial production suggest that growth has been gaining momentum in early 2024.

Exports, which are equivalent to three-quarters of Malaysia’s GDP, fell by 7.9% in volume terms in 2023 amid weakening global demand. Imports dropped by a similar order. The current account surplus was maintained, but declined to 1.2% of GDP.

Malaysia: Inflation and fiscal indicators

1 Federal government.

Source: Department of Statistics Malaysia; and Bank Negara Malaysia.

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Malaysia: Demand, output and prices

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Monetary policy is neutral while fiscal consolidation is underway

The central bank has maintained its Overnight Policy Rate at 3.0% since May 2023, which is close to its average during the 2010s. With inflation close to long-term averages, the current neutral stance is expected to be maintained. Temporary inflationary pressures from the planned withdrawal of energy subsidies will not require a monetary policy reaction, but authorities should remain vigilant to potential second‑round effects, which constitute an upside risk to inflation. Additional risks relate to future wage pressures and the recent depreciation of the Malaysian ringgit, which reached its lowest level relative to the USD since 1998 in February. The headline fiscal deficit declined to 5.0% of GDP in 2023 but is still high compared with pre‑pandemic levels. Current fiscal plans target a modest consolidation to cut the deficit to 4.3% of GDP in 2024, including by reducing energy subsidies, which disproportionally benefit the better off and run counter to climate change mitigation objectives. Replacing these with targeted benefits as planned can raise spending efficiency and reduce inequalities. Further consolidation efforts will be required to reduce the budget deficit to the 3% ceiling in the medium term, as set by the 2023 Public Finance and Fiscal Responsibility Act, and for government debt, which stood at 64% of GDP at the end of 2023, to return to the planned 60% ceiling.

The economy will strengthen gradually

Real GDP growth is projected to rise to nearly 5% by 2025, matching the rate achieved during the five years before the COVID-19 pandemic. Continued employment gains are likely to support private consumption, while the projected pick-up in global trade will boost exports. However, with electrical and electronic products accounting for 33% of its exports, Malaysia is vulnerable to increased geopolitical tensions that could disrupt supply chains and trade patterns. Swings in commodity prices also pose a risk as commodities, notably palm oil, crude oil and natural rubber, account for around one-fifth of exports. The relatively modest pace planned for fiscal consolidation leaves the public finances vulnerable to economic shocks and spending pressures.

Making economic growth more equitable and sustainable

With tax revenues amounting to only 11% of GDP, Malaysia needs to mobilise new sources of public revenues to keep government debt below the debt ceiling and finance an improved social safety net. Re‑introducing the Goods and Services Tax, which was repealed in 2018, would be an efficient source of additional revenue. On the spending side, further reducing energy subsidies, which encourage wasteful energy consumption and increase greenhouse gas emissions, would help Malaysia achieve its target of carbon neutrality by 2050. Boosting the performance of small and medium enterprises requires public support to introduce digital tools in small companies and training for their employees. Increasing female labour force participation, which was only 52.7% in 2022, is a priority. Investing more in public childcare facilities, providing subsidies to private facilities, and enforcing the implementation of the recently legislated 14‑week minimum maternity leave entitlement would promote female employment, boost potential output and decrease gender gaps.