Malaysia 2022 Consumer Outlook: Spending Picks Up Pace Although Inflation Also On The Rise

Fitch Solutions / Consumer & Retail / Malaysia / Tue 12 Jul, 2022

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Key View

  • We expect real household spending in Malaysia to grow by a further 4.4% y-o-y over 2022, an improvement from the 1.2% growth in spending recorded in 2021.
  • In 2023, household spending will strengthen slightly to 5.0% as Covid-related pressures further ease. The slowing of inflation will also provide boost to household spending in 2023.
  • High frequency data indicates a robust recovery was under way in H122 with consumer confidence rising. Latest monthly data suggest that retail sales growth over March 2022- May 2022 came in at double-digits y-o-y.

Outlook For 2022 And 2023

Consumer spending in Malaysia will post healthy growth over 2022, with real household spending projected to grow 4.4% y-o-y. This is an improvement from the 1.2% y-o-y growth estimated for 2021, where effects from the Omicron and Delta variants of Covid-19 weighed on demand. The growth in the consumer spending segment in 2022 will track wider headline economic growth which is presently forecast at 5.2% in 2022. The stable headline macroeconomic environment will provide a solid footing which is facilitated by a heathy vaccination drive and improvements in key economic verticals such as freight , logistics, and tourism. At present, we believe household spending growth will strengthen modestly in to 5.0% in 2023 as the effect of the pandemic related restrictions eases further and underlying pent-up demand is unlocked. Furthermore, the softening of inflation to 2.1% in 2023, down from 4.0% in 2022 will further support real income growth and discretionary spending trends.

2023 Growth Expected To Be Robust

Malaysia - Total Household Spending, Real % y-o-y (2019-2026)

f = Fitch Solutions forecast. Source: Local sources, Fitch Solutions

High-Frequency Data: Robust Growth In H1 2022

Latest data in retail sales shows how sales have returned to growth, posting an average of 15.8% over January - May 2022, with May's growth recorded at 29.9%, the highest over the last three years. April 2020 was the only other month when such high volatility was observed hen retailed sales slipped by -32.4% due to the pandemic related lockdowns.

Consumer confidence has largely been steady, reflecting a positive consumer mindset even as inflationary pressures in certain commodities such as food and fuel weigh on low- and mid-income households. Latest data suggests that consumer confidence in Q122 average around 107% suggesting that border openings, easing of regional lockdown restrictions and growing economic activity were all having a positive impact on consumer spending even as inflation looms in the background.

Healthy Retail Sales Growth In H1 2022

Malaysia - Consumer Confidence & Retail Sales (2019-2022)

Source: Department Of Statistics Malaysia, Malaysian Institute Of Economic Research, Fitch Solutions

Insights Into Consumer Spending

Our forecast for y-o-y growth in consumer spending in Malaysia is in line with our Country Risk team’s forecast that the Malaysian economy to grow by 5.2% in 2022, above the headline real GDP growth of 3.1% in 2021. The strong growth is predicated upon high private final consumption and domestic demand, especially as Malaysian consumers are shielded from the inflationary impact of higher commodity prices, while the ongoing semiconductor shortage will support investment in Malaysia. Real GDP growth in 2023 is presently envisaged at 3.8%, a slowdown y-o-y but strong enough to keep spending supported.

Unemployment as a percentage of the labour force will drop from 3.9% in 2022 to 3.1% in 2023 as inflationary pressures will average just 3.1% in 2023, down from 3.3% in 2022 on the back of strong foreign investments, improving tourism sector performance and increased activity in key sectors inching agribusiness, electronics, and manufacturing.

Although headline inflation has remained relatively benign in Malaysia, we note this is mainly a result of government intervention. Meanwhile, the ringgit has continued to face downward pressure in the face of an increasingly hawkish US Federal Reserve, which should prompt BNM to hike interest rates further in order to safeguard ringgit stability. Furthermore, we believe that Malaysia’s economic recovery remains on track, which will provide sufficient policy room for the central bank to tighten policy further.

Malaysia's Economic Overview

  2022f 2023f
Real GDP (% chg y-o-y) 5.2 3.8
Unemployment (% of total labour force) 3.9 3.1
Consumer price inflation (% y-o-y, ave) 3.3 3.1
Tourist Arrivals, '000 % y-o-y 5997.7 345
f = Fitch Solutions forecast. Source: Local sources, Fitch Solutions

Inflation Outlook

Inflationary pressures continue to build. Over the latter half of 2022, inflation is beginning to shift into services such as tourism. Rising consumer price inflation has been the key risk to consumer spending over 2022, and it has been eroding purchasing power and shifting consumer spending away from discretionary spending. This is the economic reality that consumers enter into in 2023. Inflationary pressure started to rise globally in 2021, as localised shortages were created by base effects, higher commodity prices and supply chain challenges. The Ukraine-Russia conflict has also significantly impacted the global supply prices of key commodities, such as oil and gas, fertiliser, wheat, corn and barley. The commodity price increases are already feeding through into higher consumer prices and this will continue over 2022.

Thanks to the blanket fuel subsidy and price controls on items included in the inflation basket, Malaysia's inflation has been kept in check so far this year, averaging at just 2.4% in the first five months of the year. Nevertheless, we note that inflation in Malaysia has been on an uptrend since March 2022, with the latest inflation print in May rising to 2.8% y-o-y, from 2.4% in April. Over the coming months, we expect inflation to continue accelerating due to elevated commodity prices and a pickup in domestic demand, informing our forecast for inflation to average 4% in 2022 and 2.1% in 2023.

Inflation To Remain Elevated Over 2022

Malaysia - Consumer Inflation, % y-o-y (2018-2022)

Source: Department Of Statistics Malaysia, Fitch Solutions

Household Debt Outlook

Malaysia has witnessed a household credit boom over the past few tears. We highlight that rapid unwinding of this could pose a significant risk to domestic demand. At last estimate, the Bank Negara Malaysia puts household debt at 74.4% of GDP. While this is slightly down from 76.4% in 2020, nominal figures still remain significantly high. Similarly, as repo rates and interest rates begin to rise, so too will debt servicing costs. This would mean households will increasingly have to allocate disposable income towards debt financing, placing downward pressure on consumer spending going forward.

High Interest Rates Could Drive Up Debt Servicing Costs

Malaysia - Household Debt And Interest Rates (2018-2023)

e/f = Fitch Solutions estimate/forecast. Source: Bank of International Settlements, Fitch Solutions

Wider Economic Challenges

Supply chain issues continue, having first appeared when economies globally started to reopen in 2021, with consumers demanding products that they had little access to over 2020. This continues to place pressure on manufacturers, with bottlenecks and consumer good shortages emerging, which has fed through into supply side inflation. For example, the global semiconductor shortage will continue through 2022 and into 2023, putting pressure on the supply of multiple consumer goods. In 2022, the risks surrounding Covid-19 have moderated, as population immunity (from vaccines and prior infection) combined with less severe variants of SARS-CoV-2 have meant that death rates have remained low through recent infection waves. This has seen many markets globally adopt a more 'live with Covid-19' approach to movement and operating restrictions, although some nations are retaining a ‘Zero-Covid’ policy.

More transmissible variants of SARS-CoV-2 and Mainland China’s zero-Covid are causing the disruption/closure of factory production and manufacturing across the world. Manufacturers are facing shortages of key components and higher raw materials costs. Inventory levels are increasing, as consumer demand shifts away from products and into services, such as tourism. This will elevate some price pressures, as companies offload stock at a discount. Finally, the Russia-Ukraine conflict continues to place significant supply pressures on key commodities, especially food supplies, pushing up final market prices across a spectrum of consumer categories. Some countries, such as India, Malaysia and Argentina have reacted by placing their own restrictions on the export of food items, putting further pressure on global prices. The graphic below highlights some of these risks to the outlook impacting Malaysia's consumer market in 2022 and into 2023.

Global Risks To Consumer Outlook
Risks To Outlook
Source: Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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