After successfully navigating through an environment of high interest rates to tame inflation in 2023, the global economy is expected to stay resilient amid the anticipated end of monetary tightening. However, challenges remain in the form of the lagged impact of previous rate hikes and the risk of inflation reaccelerating. The US Federal Reserve remains cognisant of the risks of an economic slowdown and has adopted a dovish pivot to interest rates.
In the eurozone, investment has slowed, inflation risks remain a concern, and fiscal consolidation has yet to gain traction. Consequently, the European Central Bank may be a forerunner to cut interest rates due to looming downside risks from prolonged tight monetary policy on its already slow growth. Market expectations on more rate cuts in 2024 have surged, contrasting with the official projection as central banks in advanced economies exercised caution in concluding their tightening cycle. Hence, mixed data signals could lead to a misreading of the economy and policy mistakes.
Asia is positioned to accelerate its growth despite the slower growth in advanced economies. The economic momentum in the region hinges on developments in China, which require the central government to stabilise the property market and prevent extended repercussions on private consumption. The recent upturn in the exports and manufacturing Purchasing Managers’ Index (PMI) for Korea and Taiwan, home to some of the most extensive semiconductor manufacturing facilities, signals a potential rebound that could support Asia’s economic momentum.
With Malaysia’s latest trade data pointing towards nascent signs of recovery in the external sector alongside resilience in domestic demand, we foresee Malaysia’s economic momentum to rise further to 4.0%-4.5% in 2024 (2023F: 4.0%). A recovery in the semiconductor and electronics upcycle could support the manufacturing sector and act as a stabilising force amid global economic uncertainties. On the fiscal consolidation front, we expect the fiscal deficit to improve to 4.3% in 2024, with the implementation of reforms expected to be gradual, providing support to government coffers.
We foresee inflation at 2.5%-3.0% in 2024 (2023F: 2.8%). However, inflation is poised to have a contained impact on markets, despite expectations linked to the rationalisation of fuel subsidies and the government’s easing of price interventions for other price-controlled items. Such rationalisations were designed to be manageable against a prudent government balancing multiple stakeholders’ needs. Overall, the narrative of global risk factors, the easing inflation trend, and the prospects of a stronger ringgit should provide Bank Negara Malaysia the scope to keep the overnight policy rate unchanged at 3.00% for 2024.