Malaysia’s advance GDP estimate for 2Q2024 posted a higher-than-expected economic growth of 5.8% (consensus: 4.7%, 1Q2024: 4.2%). This growth was driven by the continued strengthening of the services sector, which grew at 5.6% (1Q2024: 4.7%), marking five consecutive quarters of at least 4.0% growth. With the services sector remaining robust on the back of sustained growth in private consumption, and improvements seen in previously laggard sectors such as agriculture and mining, we have revised our 2024 GDP forecast upwards to 4.8% from 4.2%.

Domestic headline inflation rose to 2.0% in May and June, after hovering between 1.5% and 1.9% over the past eight months. This reflects the emerging impact of diesel subsidy rationalisation. Year-to-date inflation remains unchanged at 1.8%, indicating a downside risk to our inflation forecast should the RON95 subsidy rationalisation be further delayed. Looking ahead, we expect inflation to increase in 2H2024 on robust consumer spending, geopolitical risks and higher shipping rates, but may come in at the lower end of our forecast range of between 2.5% and 3.0% in 2024. As such, Bank Negara Malaysia has maintained the policy rate at 3.0%, giving the flexibility to raise or maintain interest rates, on the back of Malaysia’s economic resilience and contained inflation.

Malaysia’s foreign flows in 1H2024 netted positive at RM0.2 billion, mainly driven by government bonds. In July, the Malaysian Government Securities (MGS), German bund, and US Treasury (UST) yields mostly declined. However, equity market weakness, US election risks, and the Federal Reserve (Fed) rate cut expectations resulted in a volatile UST market. The local corporate bond market was also bullish but trailed behind MGS. Nonetheless, credit spreads remained compressed with limited scope for a further decline.

In July, market-implied rate cuts by the Fed increased to 2-3 cuts in 2024 from 1-2 cuts expected in June. This expectation was supported by the cooling labour market, reflected in the unemployment rate reaching its highest since the end of 2021 at 4.1% (May: 4.0%), and a slowdown in hiring. Additionally, the continuing disinflationary trend in the US, seen in the lower headline inflation and personal consumption expenditures index, also supports the expectation of more rate cuts.

While the overall growth outlook remains positive, multiple emerging risks on global growth require close monitoring. Weakness in the US labour market may result in reduced consumption and contribute to slower growth. In addition, slower-than-expected earnings in the tech sector which led to a stock market sell-off increased concerns over sustained momentum in the sector. Furthermore, China’s weak domestic demand may pose a drag on the global economy.