Malaysia experienced rapid industrialization from 1970 to 1990, shifting from a primarily mineral and agricultural export economy to one dominated by services and industry. In 2022, services accounted for 50.9% of GDP (value added), industry for 39.2%, and agriculture for 8.9%. As a middle-income economy, Malaysia aspires to become a high-income country by 2025. IMF’s growth projections for 2022-26 suggest that the economy is on track to meet this target, despite the severe recession in 2020.
Going forward, the major barriers to Malaysia’s economic growth and increased productivity are its demographic outlook, insufficient skill levels, as well as the trade relationship with ASEAN, China and the West.
In terms of demographic trends, the growth of the working-age population is expected to slow steadily throughout the coming years, while the number of people aged 65 or over will steadily increase. Malaysia can mitigate the economic consequences of an aging population by increasing participation in the labor force, particularly among women, and by raising the retirement age from the current 60 years to a maximum of 65 years or more. These measures could help to alleviate an anticipated shortage of experts and skilled labor.
Also, the country is in a strong position to make rapid advancements in the area skill-shortage over the next 30 years. The large ethnic-Chinese population in Malaysia provides a unique advantage for deepening trade relations with China, although unresolved overlapping maritime territorial disputes may curb this progress in the coming decade. With an expanding and ethnically diverse, reasonably educated workforce, a robust manufacturing sector, and an abundance of natural resources, Malaysia’s future seems promising. To catch up with more developed countries, long-term policies will continue to emphasize competitiveness. However, potential limitations to long-term economic growth exist. These include the political challenge of providing equal opportunities to all racial groups and the potential constraints that adherence to a more conservative form of Islam could place on progress.
On the external front, trade growth has been recognized as a key driver of expansion and is expected to continue playing this role. Two large trading blocs will dominate the first half of the 21st century in Asia – the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The establishment of RCEP in the early 2020s and the enlargement of the CPTPP will provide a solid foundation for building a free-trade agreement for the Asia-Pacific region. However, negotiations for such a deal are not expected to be concluded until the 2030s at the earliest.
GDP Data is updated in January, 2023. Figures below represent GDP contribution with the expenditure approach by segment. Data is sourced from World Bank, IMF, and local government and refactored by our team. Forecasted data is from EIU.
The forecasted real GDP growth of Malaysia is projected to decelerate from 8.7% in 2022 to 4.5% in 2023 (IMF Forecast). This slowdown is anticipated due to the impact of a slowing global economy on external demand, despite an expected uptick in economic activity from China, which is Malaysia’s largest export partner. Domestically, demand is also predicted to decelerate, reflecting the negative impact of monetary policy tightening and a generalized downturn in investment spending by both local and foreign investors. The 2023 forecast takes into account a typical contraction in sequential growth in the first quarter due to the Lunar New Year holiday in both China and Malaysia, as well as a broad decline in overseas orders following the seasonal rush at the end of the previous year.
In the second half of 2023, the anticipated influx of international tourists, including those from China, will bolster the services sector following the lifting of border and quarantine restrictions in early January. However, it’s important to note that the tourism sector contributes a comparatively smaller portion of GDP at factor cost, with the country’s established electronics parts and components industry having a much larger share. As a result, the output growth from the industrial sector is projected to decelerate from an estimated 6.7% in 2022 to 4% in 2023, due to declining business and consumer confidence in developed markets negatively impacting overseas orders. Even though coronavirus-related restrictions were lifted in April 2022, local business sentiment will likely be negatively impacted by the rising cost of borrowing and higher operating costs.
In the next five years, private consumption is projected to continue being the primary driver of Malaysia’s economic growth in terms of expenditure. The purchasing power of households is expected to stay relatively strong, aided by low consumption taxes. However, the high level of household debt is a potential downside risk to this forecast, particularly if Bank Negara Malaysia (BNM) implements monetary policy tightening at a faster pace in 2023 than currently expected. Nevertheless, ongoing infrastructure projects will likely provide some support to investment spending.
Inflation: Consumer price inflation in Malaysia is forecasted to ease from 3.4% in 2022 to 2.9% in 2023, despite the expectation of persistently high food prices throughout the year. A moderation in services prices is anticipated, owing to increased competition resulting from the reopening of more sectors to tourism. Although global energy prices will likely stay relatively high, their impact on the consumer price index should be mild due to ongoing government subsidies for fuel and electricity tariffs. Any removal of these subsidies, which is currently not in our central forecast, would likely lead to a significantly higher headline inflation rate. The government’s likely success in creating a targeted fuel subsidy system in 2023-24 could push up the consumer price index, but any negative impact might be offset by progress in eliminating cartels in the food supply chain, thus easing price pressures in a category that accounts for 30% of the overall index.
Malaysia is a high-middle-income country with a rapidly growing population. From 1960 to 2021, the national population has increased from 8.2 million to 33.57 million, an increase of 311.6% in 61 years, nearly twice the global growth rate over the same period. The population has long been concentrated on the west coast of the Malay Peninsula. The capital Kuala Lumpur and Penang are located in the central and northern parts of the west coast respectively, and are the economic, cultural and political centers of Malaysia.
The national population is mainly divided into three categories: Malays, Chinese and Indians. The Malays are the most numerous and politically influential group. The Chinese population accounts for about one-fifth of the Malaysian population, and most of them come from southeastern China, such as Guangdong, Guangxi, southern Fujian, northern Fujian and other regions, so the languages are quite diverse.
With Malaysia’s gradual industrialization and continuous increase in income, Malaysia’s population growth rate has also gradually slowed down. Growth in 2021 is the slowest in 61 years at 1.1%, down from 2.5% in 2000. Compared with other Southeast Asian economies, such as Thailand (0.2%), Indonesia (0.7%), and Vietnam (0.8%), the growth rate is still relatively high, but there is still the problem of population slowdown.
The root cause of the slowdown in Malaysia’s population growth is the decline in fertility. Although the reduction in fertility rate is a global trend, it is the case in countries such as the United Kingdom, the United States, Japan, Indonesia and Singapore. According to World Bank statistics, Malaysia’s fertility rate (TFR) has dropped from 6.7 births per woman in 1957 to a 40-year low of 1.7 births, which is lower than the world average of 2.3 . One reason for this is the increase in female education and labor force participation. In addition, factors such as increasing age at first marriage, urbanization, changes in lifestyle, economic status and use of family planning methods also contribute to the decline in fertility.
Another factor affecting population growth is that the number of international immigrants has declined in recent years, but immigration will still be an important support for Malaysia’s population growth. According to official estimates, between 2018 and 2020, Malaysia has accepted about 1.4 million to 2 million documented immigrants, making Malaysia one of the most immigrant-receiving countries in Southeast Asia. Citizens make up 92.6 percent of the population, while non-citizens make up 7.4 percent, according to official figures.
Malaysia’s annual population growth rate is expected to slow to 0.2% in 2022 due to a reduction in the number of non-citizens entering the country during the pandemic. According to a report by the National Bureau of Statistics, the number of foreigners accounting for 7.4% of the total population is estimated to drop from 2.6 million in 2021 to 2.4 million in 2022, which is the main reason for the decline in population growth.
Due to slowing population growth and rising proportion of elderly population, Malaysia will face the trend of rapid aging. In 2020, the proportion of Malaysia’s population over the age of 65 will reach 7%, which is in line with the definition of an aging society in the world. However, the employment rate for those aged 55 to 64 is only 45.2%, which is low in a higher-income economy. In particular, women aged 55 to 64 have lower employment rates. To combat the effects of aging, the government is encouraging more people to enter the labor force, especially Muslim women, and has proposed raising the retirement age from 60 to 65 or higher.
Despite the challenges posed by an aging population, Malaysia’s labor force participation rate is growing steadily, from 60% in 2010 to 65% in 2021 . According to the official statistics department, in the second quarter of 2022, Malaysia’s labor market is positively rising. As the impact of the epidemic is alleviated, economic activities are gradually normalizing and borders are reopening, the number of employed people continues to rise, reaching the highest ever figure of 1,570 million people.
As the government grapples with the immediate challenge of offsetting the effects of rising costs for essential items, it is clear that its strategic direction will have a significant impact. Notably, this is occurring despite the fact that the country’s headline inflation rate is considerably lower than some of its regional counterparts. Current subsidies on electricity and fuel are already in place and are projected to remain for an indefinite period. Furthermore, as the headline rate of food price inflation remains at peak levels, price caps on essential food items are likely to be maintained throughout 2023-24.
The government is set to utilize the midterm review of the 12th Malaysia Plan – a five-year financial scheme spanning from 2021 to 2025 – as a platform to establish its medium-term objectives. Slated for completion by September 2023, the review is anticipated to stimulate increased expenditure on infrastructure projects in the subsequent years of 2024-25. A core feature of the plan is the preservation of an initiative aimed at elevating equity ownership by bumiputera. This measure is integral, as its removal could spark the exit of at least two pro-Malay factions from the unity government, potentially instigating a parliamentary crisis.
Anwar Ibrahim, the leader of the multicultural Pakatan Harapan (PH) coalition, helms a unity government, which includes pro-Malay factions. Because of the need to govern alongside their traditional ideological rivals, Malaysia has not yet made a clear shift towards multiculturalism. Ethnic-Malay identity politics continue to wield a significant influence, and their presence within the unity government will limit Anwar’s progressive leanings. He has already committed to maintaining ethnic-Malay preferences, such as increasing their wealth ownership. Any attempt to dismantle these preferences would likely lead to the departure of the pro-Malay faction from the government, jeopardizing the PH’s operational parliamentary majority. This faction is also expected to resist any efforts to cap the tenure of the prime minister to two terms.
Anwar may be successful, however, in implementing anti-corruption measures. These may include separating the attorney-general’s chamber from the public prosecutor, introducing a political finance act, and passing a law to protect whistle-blowers. A law against party-hopping, along with the Barisan Nasional’s (a former ruling coalition) aversion to collaborating with the opposition Parti Islam Se-Malaysia, should enhance political stability in the coming years. The signing of a memorandum of agreement by the coalition’s constituent parties, functioning similar to a confidence-and-supply pact, will support policymaking. Yet, there remains a low risk that the strains of consensus-building could lead to a premature collapse of the government.
Looking ahead, the PH’s triumph in becoming the largest party alliance may appear less substantial. The fall of the well-established United Malays National Organization and the rejection of another pro-Malay party led by former prime minister Mahathir Mohamad have bolstered the prospects of the opposition PAS and the governing Gabungan Parti Sarawak. This could result in a more unified Malay vote in the next election, scheduled for 2027, which may undermine the PH’s standing as a governing party. A lot will hinge on whether Muhyiddin Yassin, the leader of the opposition PN, can rally his party and the PAS against the government. To do this, he will have to appeal to ethnic-Malay identity, particularly in rural areas. The division of Malay loyalties between the PPBM and the PAS may be crucial in preventing the PAS from monopolizing the rural and conservative Malay votes in the upcoming election. While Yassin might be successful, this could likely stoke ethnic tensions in the long term, resulting from disagreements over ongoing affirmative action policies favoring bumiputera. As Anwar seeks to avoid this, his scope for action remains constrained at the helm of a large and potentially unwieldy governing coalition.
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