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Malaysia Economic Monitor - December 2019: Making Ends Meet

Core Content

The Malaysia Economic Monitor (MEM) for December 2019 focuses on the country's economic performance and the challenges faced by households in meeting their basic living costs. It provides a comprehensive overview of recent economic developments and a macroeconomic outlook for 2020, emphasizing the need for both short-term relief and long-term structural reforms to address the cost of living issue.

Main Points

Recent Economic Developments

• Growth Deceleration: Malaysia's economy expanded at a slower pace in Q3 2019, with GDP growth at 4.4% compared to 4.9% in Q2. This slowdown reflects subdued global conditions and heightened uncertainty.
• Private Consumption: Remained the largest contributor to growth, increasing at 7.0% in Q3, supported by moderate inflation and wage growth.
• Investment Activity: Both public and private investment slowed, with public investment contracting for the eighth consecutive quarter.
• Export and Import Trends: Export growth weakened further in Q3, with a 1.4% decline, and imports recorded negative growth. The current account surplus narrowed to 3% of GDP.
• Inflation: Headline inflation rose to 1.3% in Q3, while core inflation remained stable at 1.5%. The reintroduction of float pricing for petrol in 2020 is expected to lead to modest increases in transportation costs.
• Financial System: Remained stable, with resilient banking systems and moderate household debt levels at 82.4% of GDP.

Economic Outlook for 2020

• Moderate Growth: GDP growth is projected to be 4.5%, slightly revised from 4.6% due to weaker-than-anticipated investment and export growth.
• Private Consumption: Expected to grow at 6.5%, driven by stable labor market conditions and relatively benign inflation.
• Public Sector: Government consumption is projected to grow at 1.8%, while public investment is likely to continue its contraction.
• Inflation: Projected to rise to 1.5–2.0% in 2020, reflecting the dissipation of the effects of tax policy changes in 2018.
• Downside Risks: Global trade tensions, slowdowns in major economies, and potential drops in commodity prices could negatively impact growth and fiscal stability.

Key Challenges in Making Ends Meet

Household Income and Living Costs

• Income Inequality: There is a significant gap between macroeconomic indicators and household perceptions of the cost of living, particularly among lower-income groups.
• Income Growth: Lower-income households have seen a marked slowdown in income growth, and younger workers have experienced sluggish income growth despite higher educational attainment.
• Perceived Cost of Living: Many Malaysians, especially in urban areas, feel their income is insufficient to maintain living standards.

Borrowing and Financial Behavior

• Debt Utilization: Lower-income households increasingly rely on personal finance loans and credit cards to cope with living costs.
• Financial Savings: Malaysian households, particularly lower-income ones, do not have sufficient financial savings, making them more vulnerable to economic shocks.

Housing Affordability

• Housing Shortages: The availability of affordable housing has declined over the years.
• Regional Disparities: Access to affordable housing varies significantly by location and household circumstances.
• Government Policies: Housing policies have mixed impacts on supply and affordability, with programs like PR1MA and PPR aiming to improve access but facing challenges in implementation and effectiveness.

Policy Recommendations

Short-Term Measures

• Immediate Relief: Focus on alleviating hardships for lower-income households through targeted subsidies and support mechanisms.
• Fiscal Adjustments: The government is expected to maintain a path of fiscal consolidation, with a revised fiscal deficit target of 3.2% of GDP for 2020.

Medium- to Long-Term Reforms

• Structural Reforms: Needed to address human capital gaps, enhance opportunities for women, and improve private sector competitiveness.
• Tax Reform: Increasing the progressivity of the tax system, including a new income tax band for those earning over RM2 million, could help raise revenues and improve redistribution.
• Investment and Trade: Strengthening Malaysia's competitiveness in attracting quality investments and deepening regional integration are crucial to sustain growth and mitigate external risks.

Key Agencies and Partners

• Task Team Leaders: Richard Record and Kenneth Simler
• Contributors: Shakira Teh Sharifuddin, Yew Keat Chong, Mahama Samir Bandaogo, Dao Harrison, Zainab Ali Ahmad, and others from government and private sectors
• Supporting Institutions: Ministry of Economic Affairs, Bank Negara Malaysia, Ministry of Finance, and various research and policy organizations

Legal and Licensing Information

• The report is licensed under Creative Commons Attribution 3.0 IGO (CC BY 3.0 IGO).
• Users must attribute the source as World Bank (2019) "Making Ends Meet" Malaysia Economic Monitor (December), World Bank, Washington, DC.
• For translations or adaptations, appropriate disclaimers must be added.

Conclusion

The MEM highlights the need for a balanced approach to address the cost of living challenge in Malaysia. It underscores the importance of both short-term measures to support vulnerable households and long-term structural reforms to enhance economic resilience and inclusiveness. The report also emphasizes the role of fiscal policy, tax reform, and private sector confidence in driving sustainable growth and shared prosperity.