Malaysia’s economic growth eased further to 2.9% y/y in 2Q23 (from +5.6% in 1Q23), which was lower than our estimate (+3.2%) and Bloomberg consensus (+3.3%). The pace of growth is the slowest since 3Q21 albeit largely weighed down by a high base effect from last year. On a seasonally adjusted basis, GDP recorded a larger increase of 1.5% q/q (1Q23: +0.9% q/q).

Despite a sustained easing trend from its peak in 3Q22, growth performance is not bad considering the negative external outlook and normalisation of domestic demand as pandemic measures are rolled back. Malaysia’s domestic demand has fared well given the negative external outlook while foreign inflows (FDI and portfolio) persisted and the labor market improved. We anticipate more clarity on domestic economic policies and plans in the coming months that would help to catalyse higher investments and Malaysia’s growth momentum. Nevertheless, recognizing a more challenging external environment and reflecting a weaker 2Q23 GDP growth number, we tweak our 2023 full-year GDP forecast lower to 4.0% from 4.4% previously. This downward revision further supports our call for the Overnight Policy Rate (OPR) to stay unchanged at 3.00% for the rest of the year.