KUALA LUMPUR: Malaysia's growth prospects are expected to improve given the slower contraction in Malaysia's Leading Index (LI), which fell by 0.3 per cent year-over-year (YoY) in September.
MIDF Research said the decline was the slowest fall in seven months of contraction since March 2023.
It expects the growth outlook to gradually improve in the fourth quarter of 2023 (4Q 2023).
"Despite the persistent moderate momentum because of the weak external trade, continued growth in the Coincident Index (CI) also signals the country's economic growth remained in the positives, as shown by the sustained gross domestic product growth in 3Q 2023," the firm said.
Malaysia's economic growth accelerated slightly to 3.3 per cent in 3Q 2023, (2Q 2023: 2.9 per cent Y-o-Y).
MIDF Research said the moderate growth below 4.0 per cent growth reflects the continued drag from weak external demand, while the sustained growth was anchored by the continued rise in domestic demand, thanks to growing spending activities on the back of positive job market conditions.
On the country's headline inflation rate, MIDF Research said the figure is close to a three-year low, with the headline inflation rate registering at 1.8 per cent Y-o-Y in October, the lowest since March 2021.
"The inflation rate was below market consensus of 1.9 per cent Y-o-Y. Non-food inflation rate stayed at 0.9 per cent y-o-y while the food inflation rate moderated to almost a two-year low at 3.6 per cent Y-o-Y.
"The softening inflationary pressure, among others, was due to high base effects and normalisation of global commodity prices," it added.
Malaysia's labour market continued on an improving trend as the unemployment rate maintained at a post-pandemic low of 3.4 per cent in September 2023.
Labour force and employment growth rates continued albeit at a moderating pace of 1.8 per cent YoY and 2.0 per cent YoY, respectively, the slowest in two years.
On a month-on-month basis, employment grew 1.0 per cent month-on-month, marking the 27 straight months of positive gains.
MIDF Research said Malaysia's economy will be able to register growth at 4.2 per cent this year, moderating from 8.7 per cent expansion in 2022.
"Despite the drag from weak external demand, the continued growth in domestic spending and investment activities underpin the sustained growth this year. This was backed by healthy labour market conditions, positive income growth and tourism sector recovery.
The firm expects growth momentum to improve from the fourth quarter of 2023 as external trade is expected to continue to pick up into 2024.
Nevertheless, several risks could derail growth outlook such as escalation of geo-political tensions, possible supply disruptions, fluctuations in the commodity and financial markets and possibility of sharp decline in external demand.
"Domestically, we are wary of the elevated price outlook in view of the planned policy changes by the government, which could affect consumer spending next year," said MIDF Research.