- Year-on-year GDP Growth Rate in Q2 of 2024 Exceeds Expectations of a 5.8% Rise
- Trade Surges to RM705.57 Billion with Robust Growth in Exports and Imports
- Malaysia’s Emergence as a Data Center Powerhouse Amid AI Boom
- Malaysia Aims for RM500 Billion in Semiconductor Investment to Enhance Chip Manufacturing
Malaysia Economic Update Report
Quarter 2, 2024
In this issue:
Malaysia’s Gross Domestic Product (GDP) year-on-year growth rate in the second quarter of 2024 reached the highest record since Q2 2023, exceeding analysts’ and government expectations of a 5.8% rise
The Department of Statistics Malaysia (DOSM) released its latest data on August 16th, 2024, highlighting encouraging developments in Malaysia's economic performance.
The country’s gross domestic product (GDP) registered a year-on-year (YOY) growth of 5.9%, amounting to RM400.7 billion. This growth not only exceeded both the government’s expectations and the Bloomberg consensus median forecast of 5.8%, but it also represents the highest YOY growth rate since the first quarter of 2023. Furthermore, on a quarter-on-quarter basis, GDP for Q2 2024 increased by 2.9%, marking the most robust quarterly growth since the third quarter of 2022.
The growth is driven by stronger domestic demand and further expansion in exports. Household spending increased amid sustained positive labor market conditions and larger policy support. Investment activity was underpinned by continued progress in multi-year projects and capacity expansion by firms. Exports improved amid higher external demand and positive spillovers from the global tech upcycle. Most supply-side sectors registered higher growth. The manufacturing sector was supported by broad-based improvement across all clusters, particularly in electrical and electronics (E&E). The services sector recorded strong growth, driven by consumer and business-related subsectors.
The Q2 2024 growth brought the expansion rate in the first half (H1) of 2024 to 5.1% (H1 2023: 4.1%), putting Malaysia in a comfortable position to cap off the year with a growth in the upper end of the Government’s official forecast range of 4% to 5%.
- Construction Sector: The construction sector witnessed a significant year-on-year growth of 17.3% in Q2 2024, accelerating from 11.9% in the previous quarter and 6.2% in Q2 2023. Ongoing civil engineering projects and specialized construction activities largely drove the sector’s expansion.
- Agriculture Sector: The agriculture sector showed remarkable growth of 7.2% year-on-year in Q2 2024, a substantial rise from 1.7% in the previous quarter and a recovery from a contraction of -0.7% in the same period last year. This surge was largely driven by strong performance in palm oil production and livestock farming
- Services Sector: The services sector experienced a robust year-on-year growth of 5.9% in Q2 2024, up from 4.8% in the previous quarter and 4.5% in the same period last year. This acceleration was driven by strong performance in consumer and business-related subsectors, particularly wholesale and retail trade, reflecting increased household spending and business activities.
- Manufacturing Sector: Manufacturing output rose significantly by 4.7% year-on-year in Q2 2024, a notable increase from 1.9% in the previous quarter and just 0.1% in Q2 2023. The sector’s growth was underpinned by broad-based improvements across clusters, with notable contributions from non-metallic minerals, basic metals, and the petroleum, chemical, and rubber & plastics industries.
- Mining and Quarrying Sector: The mining and quarrying sector recorded a moderate growth of 2.7% year-on-year in Q2 2024, down from 5.7% in the previous quarter but a recovery from the -2.1% contraction in Q2 2023. The slowdown in growth was primarily due to a moderation in natural gas production.
- Import Duties: Import duties saw a modest year-on-year growth of 2.7% in Q2 2024, slightly lower than the 3.5% growth in the previous quarter and a significant drop from the 7.1% growth in the same period last year, reflecting a moderation in import demand.
In the first half of 2024, headline and core inflation averaged 1.8%. During the second quarter, both measures of inflation experienced a slight increase, rising to 1.9% (Q1 2024: 1.7% and 1.8% respectively). This upward movement was primarily driven by a rise in housing and utilities inflation, which reached 3.1% (Q1 2024: 2.6%). Additionally, the proportion of Consumer Price Index (CPI) items recording monthly price increases rose to 49.4% during the quarter (Q1 2024: 44.2%; Q2 average from 2011-2019: 43.9%), partly reflecting price adjustments during the festive season and the implementation of several government policy measures.
Looking forward, headline and core inflation are expected to rise moderately in the second half of 2024, largely due to the rationalization of diesel subsidies. However, the impact is anticipated to be manageable, owing to the government’s mitigation measures aimed at minimizing cost pressures on businesses. For the remainder of the year, inflationary risks will largely depend on the extent of spillover effects from additional domestic policy measures concerning subsidies and price controls, as well as global commodity prices and financial market developments. Overall, headline and core inflation are projected to remain within the forecast ranges of 2.0% ‒ 3.5% and 2.0% ‒ 3.0% respectively.
Credit growth in the private non-financial sector increased to 5.4% in Q2 2024 (Q1 2024: 5.2%), driven by higher growth in outstanding business loans (5.6%; Q1 2024: 5.1%) and outstanding corporate bonds (3.4%; Q1 2024: 3.2%). The expansion in business loans was supported by increased demand for both investment-related and working capital loans. Sector-wise, stronger growth was observed in the construction and manufacturing industries. For households, loan growth remained steady across most loan purposes, particularly in the mortgage segment, with outstanding loan growth maintained at 6.2% (Q1 2024: 6.2%).
As of August 13, 2024, the ringgit has appreciated by 3.1% against the US dollar. On a nominal effective exchange rate (NEER) basis, the ringgit also recorded an appreciation of 5.3%. This strengthening of the currency was partly due to increasing expectations among financial market participants of potential US policy rate cuts, which alleviated pressure on regional currencies, including the ringgit.
The coordinated efforts by the Government and Bank Negara Malaysia (BNM), in collaboration with Government-Linked Companies (GLCs) and Government-Linked Investment Companies (GLICs), were essential to address the short-term external pressures on the ringgit. These efforts were necessary to stabilize the currency amidst global uncertainties and to ensure sustained economic growth. The government and BNM have intensified actions, such as encouraging the repatriation and conversion of foreign investment income and hedging foreign currency assets, to support the ringgit. Additionally, BNM has focused on increasing the use of local currency for trade settlements, aiming to reduce reliance on the US dollar. These measures have resulted in more consistent and significant inflows into the foreign exchange market, leading to an increase in the daily average FX trading volume to USD18.0 billion from February 26 to August 13, 2024, and improved liquidity in the domestic market. Over the long term, these initiatives are expected to bolster investor confidence, enhance the resilience of Malaysia’s financial markets, and contribute to a more stable economic environment.
Malaysia's Q2 2024 Trade Surges to RM705.57 Billion with Robust Growth in Exports and Imports, ASEAN and US Lead Market Expansion
Malaysia's trade performance in Q2 2024 reached RM705.57 billion, marking a 2.2% increase from the previous quarter and a 10% growth year-on-year. The country maintained a strong trade surplus of RM32 billion.
Malaysia’s trade performance in the second quarter of 2024 continued to demonstrate robust expansion, underscoring the country’s resilience in navigating global economic challenges. Total trade for Q2 2024 reached RM705.57 billion, representing a 2.2% increase from the previous quarter (Q1 2024: RM690.53 billion) and a notable 10% growth compared to the same period last year (Q2 2023: RM641.42 billion). The country sustained a healthy trade surplus, amounting to RM32 billion in Q2 2024.
Exports during this period reached RM368.78 billion, reflecting a 1.8% increase quarter-on-quarter and a 5.8% rise year-on-year. Malaysia’s primary export products included Electrical and Electronic Products, Petroleum Products, and Palm Oil and Palm Oil-Based Agricultural Products. Noteworthy year-on-year growth was observed in the export of Machinery, Equipment, and Parts, which increased by 22.8%, Palm Oil-Based Manufactured Products, which rose by 17.1%, and Optical and Scientific Equipment, which grew by 13.8%. The top three export markets for Malaysia during this quarter were Singapore, China, and the United States.
On the import front, Malaysia recorded RM336.79 billion in Q2 2024, marking a substantial year-on-year growth of 15% and a quarter-on-quarter increase of 2.6%. Key import products included Electrical and Electronic Products, Petroleum Products, and Machinery, Equipment, and Parts, with the latter experiencing the highest year-on-year growth at 36.5%. The leading sources of Malaysia’s imports during this period were China, Singapore, and the United States. This surge is largely driven by Malaysia’s accelerated push towards advanced manufacturing and infrastructure development, requiring sophisticated machinery and technology. Additionally, the country’s commitment to enhancing its technological capabilities, particularly in sectors like electronics and automotive manufacturing, has fueled the demand for cutting-edge machinery and equipment. These imports are crucial for supporting Malaysia’s broader economic strategy to move up the value chain and strengthen its position in the global market.
In the first half of 2024, trade with Free Trade Agreement (FTA) partners expanded by 5.7% to RM922.14 billion. Exports rose by 1.4% to RM500.77 billion, while imports saw a significant increase of 11.3%, reaching RM421.37 billion compared to the corresponding period in 2023. Overall, imports increased by 13.8% year-on-year, totaling RM664.99 billion. Notably, imports of intermediate goods increased by 21.2% to RM361.73 billion, capital goods surged by 35% to RM76.95 billion, and consumption goods rose by 15.2% to RM57.32 billion.
Detailed analysis of trade growth in the first half of 2024 with Malaysia’s main trading partners is as follows:
- ASEAN: Trade with ASEAN grew by 7% to RM379.96 billion compared to the same period in 2023. Exports to the region increased by 4.3% to RM219.9 billion, driven by strong demand for petroleum products, machinery, equipment, and parts, as well as crude petroleum. Imports from ASEAN rose by 10.9% to RM160.06 billion.
- China: Trade with China expanded by 8.9% to RM234.09 billion in the first half of 2024 compared to the corresponding period in 2023. Exports to China fell slightly by 1.1% to RM90.7 billion due to lower exports of Electrical and Electronic Products, but this was offset by higher exports of paper and pulp products, LNG, and metal manufactures. Imports from China increased by 16.5% to RM143.39 billion.
- The US: Trade with the United States grew by 18.8% to RM140.53 billion compared to the same period in 2023. Exports recorded double-digit growth of 12.1% to RM86.91 billion, driven by larger exports of Electrical and Electronic Products, machinery, equipment, and parts, as well as optical and scientific equipment. Imports from the United States surged by 31.6% to RM53.62 billion.
- The EU: Trade with the European Union increased by 4.1% to RM106.05 billion compared to the corresponding period in 2023. Exports edged up by 0.1% to RM56.08 billion, supported by higher exports of palm oil and palm oil-based products, processed food, and Electrical and Electronic Products. Imports from the EU rose by 9% to RM49.97 billion.
- Taiwan: Trade with Taiwan saw remarkable growth, expanding by 30.7% to RM82.88 billion compared to the first six months of 2023. Exports to Taiwan grew significantly by 44.3% to RM30.85 billion, supported by higher exports of Electrical and Electronic Products, as well as optical and scientific equipment. Imports from Taiwan increased by 23.8% to RM52.03 billion. The sharp increase in Malaysia’s trade with Taiwan stems from growing economic ties and mutual demand in the high-tech and semiconductor industries. Malaysia’s exports bolster Taiwan’s tech sector, while imports meet Malaysia’s demand for advanced machinery and components.
Malaysia's Emergence as a Data Center Powerhouse Amid AI Boom
Malaysia is rapidly emerging as a data center powerhouse in Southeast Asia, driven by booming demand for AI and cloud services. Google's recent $2 billion investment to build its first data center in the country underscores Malaysia's growing digital prominence.
Malaysia is rapidly solidifying its position as a key data center hub in Southeast Asia, fueled by a surge in demand for cloud computing and artificial intelligence (AI). This transformation is underscored by recent substantial investments from global tech giants, including a significant $2 billion commitment from Google to establish its first data center and cloud region in the country. Read more about how Data Centers in Southeast Asia are expanding and their opportunities amid rising AI adoption here.
Google’s $2 billion investment in Malaysia, announced recently in May 2024, marks a pivotal moment in the country’s digital evolution. This investment is not only Google’s largest in Malaysia in its 13-year history but also a significant leap in the country’s ambitions to become a regional digital leader. The planned data center will power Google’s suite of digital services, such as Search, Maps, and Workspace, while the new cloud region will cater to the growing needs of both public and private sector organizations.
The strategic timing of Google’s investment aligns with Malaysia’s “Cloud First Policy,” which emphasizes the importance of integrating advanced cloud and AI technologies into the nation’s economic framework. Ruth Porat, President, CFO, and CIO at Alphabet and Google, highlighted that this move will significantly bolster Malaysia’s efforts to embed AI and cloud capabilities into its industrial and service sectors, helping them ascend the global value chain.
The small city of Johor Bahru, situated on the border with Singapore, has emerged as a focal point in Malaysia’s data center expansion. Once an unremarkable player in the regional data center market, Johor Bahru is now set to surpass Singapore as the largest data center market in Southeast Asia, according to DC Byte’s 2024 Global Data Centre Index. The city currently boasts 1.6 gigawatts of data center supply, with numerous projects in various stages of planning and construction.
This rapid growth is largely a result of shifting investment trends. Historically, data center investments were concentrated in established markets like Japan, Singapore, and Hong Kong. However, the global pandemic accelerated digital transformation and cloud adoption, driving demand in emerging markets such as Malaysia. Companies now view Johor Bahru as a prime location for data centers, offering ample space, energy, and favorable policies, particularly when compared to the constrained environments of neighboring city-states.
The boom in AI services has been a critical factor in driving the demand for data centers. Training and deploying AI models require vast amounts of data and computational power, which, in turn, necessitates specialized data center infrastructure. While traditional markets like Japan continue to attract significant AI data center investments, Malaysia’s emerging markets offer unique advantages, including lower costs for land and energy, which are essential for the large-scale operations these centers require.
Moreover, Malaysia’s proactive approach to facilitating data center growth has been instrumental. The Green Lane Pathway initiative, launched in 2023, streamlined the approval process for data center projects, reducing lead times to as little as 12 months. Such initiatives have made Malaysia an increasingly attractive destination for global tech companies looking to expand their data center operations.
Despite the economic benefits and the bolstering of Malaysia’s digital infrastructure, the rapid expansion of data centers has raised concerns about the strain on local resources. With the potential electricity demand from data centers in Malaysia expected to reach 5 gigawatts by 2035, there are growing apprehensions about the sustainability of this growth. Malaysia’s current installed electrical capacity stands at approximately 27 gigawatts, which indicates that the burgeoning data center industry could place significant pressure on the nation’s energy grid.
Additionally, the high-water usage required for cooling these data centers has prompted local officials in Johor Bahru to advocate for stricter guidelines on green energy usage. Ensuring that the growth of data centers does not compromise the local population’s access to essential resources remains a critical issue that policymakers must address.
As Malaysia continues to attract billions of dollars in data center investments, its position as a data center powerhouse in Southeast Asia is becoming increasingly evident. Google’s recent commitment of $2 billion investment is a testament to the country’s potential to become a leader in AI and cloud computing. However, balancing this growth with sustainable practices will be key to ensuring that Malaysia’s data center boom benefits both the economy and the local population in the long term.
Malaysia Aims for RM500 Billion in Semiconductor Investment to Enhance Chip Manufacturing
Malaysia is making a bold move to secure RM500 billion in semiconductor investments, aiming to elevate its position in the global chip manufacturing industry. This initiative is set to advance the country's capabilities in high-value semiconductor production, reinforcing its role as a key player in the global market.
Malaysia is rapidly establishing itself as a significant player in the global semiconductor industry, propelled by strategic initiatives such as the opening of Infineon’s new semiconductor fabrication facility in Kulim and the government’s ambitious National Semiconductor Strategy (NSS). The first phase of the NSS targets RM500 billion in investments, strongly emphasizing domestic direct investments (DDI) aimed at advancing integrated circuit design, advanced packaging, and manufacturing equipment. In the subsequent phase, the strategy seeks to establish at least 10 Malaysian companies specializing in advanced packaging with revenues between RM1 billion and RM4.7 billion, alongside the development of at least 100 semiconductor-related companies with revenues approaching RM1 billion. These efforts are positioning Malaysia as a rising hub in chip manufacturing, poised to enhance its role in the global semiconductor supply chain.
The inauguration of Infineon’s facility in Kulim, which is anticipated to become the world’s largest silicon carbide factory, marks a pivotal moment in Malaysia’s semiconductor sector. This development underscores the country’s growing appeal to major semiconductor companies seeking to diversify their operations amid shifting global geopolitical dynamics. Malaysia’s stable political environment, clear industrial policies, and commitment to energy transition have all played crucial roles in bolstering investor confidence.
In a significant move back in December 2021, American semiconductor giant Intel announced an investment exceeding $7 billion to establish a chip packaging and testing facility in Malaysia. Intel’s presence in Malaysia dates back to 1972 when it made its first overseas investment of $1.6 million in an assembly site. Over the years, Intel has expanded its footprint in Malaysia by adding a full test facility and a development and design center.
Similarly, in September last year, GlobalFoundries launched a hub in Penang to support its global manufacturing network, complementing its existing facilities in the U.S., Europe, and Singapore. These investments highlight Malaysia’s growing importance in the global semiconductor landscape.
Prime Minister Anwar Ibrahim has emphasized the critical role these investments play in strengthening Malaysia’s semiconductor ecosystem. He noted that the government’s proactive approach, including policy clarity and financial incentives, has been instrumental in attracting such significant investments. Infineon’s commitment is seen as a strong endorsement of Malaysia’s capabilities in semiconductor manufacturing.
To further establish itself as a semiconductor hub, Malaysia has introduced the National Semiconductor Strategy (NSS), a comprehensive plan aimed at fostering high-value developments in the sector. With an ambitious target of RM500 billion in investments, the NSS seeks to transition Malaysia from its traditional role in outsourced semiconductor assembly and testing to more advanced sectors like chip design, wafer fabrication, and advanced packaging.
The Malaysian government has earmarked RM25 billion in fiscal support to drive this transformation, focusing on building a robust ecosystem that supports high-value manufacturing. This includes initiatives to create at least 10 local companies specializing in semiconductor design and packaging and efforts to train and upskill 60,000 Malaysians to meet the growing demand for skilled engineers in the industry.
Although Malaysia is currently the world’s sixth-largest semiconductor exporter, the industry has traditionally been concentrated on the back-end of the supply chain. The NSS aims to shift this focus by promoting innovation and high-value activities within the semiconductor sector, creating higher-income jobs and enhancing Malaysia’s global competitiveness.
As Malaysia continues to attract significant investments from global semiconductor giants like Intel, GlobalFoundries, and Infineon, its vision of becoming a leading chip manufacturing hub in Southeast Asia is steadily advancing. However, the long-term success of this initiative will hinge on the government’s ability to maintain investor confidence and cultivate a skilled workforce capable of sustaining industry growth.
About this report
This report was compiled with contributions from the team of business experts in our Malaysia office.
ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as ESG and operational improvement and compliance.
If you are interested in exploring how we can support your business in Malaysia, reach out through our contact page, or leave your email below for a representative to contact you directly:
References
- Malaysia’s economy grows beyond expectations in Q2 | Vietnam Plus
- Consumer Prices Dashboard | OpenDOSM – Department of Statistics Malaysia
- Gross Domestic Product (GDP) Dashboard | OpenDOSM – Department of Statistics Malaysia
- Economic and Financial Developments in Malaysia in the Second Quarter of 2024 | Bank Negara Malaysia – Central Bank of Malaysia
- Economic Growth Trumps Expectations For Two Straight Quarters In 2024 | Malaysia Ministry of Finance
- Trade Performance 2024 | Malaysia External Trade Development Corporation – The National Trade Promotion Agency of Malaysia
- Google to invest $2 billion in Malaysia and build data center to capture rising AI demand | CNBC
- Malaysia is emerging as a data center powerhouse amid booming demand from AI | CNBC
- Malaysia targets RM500 billion semiconductor investment, levels up chip manufacturing | The Business Times
- Malaysia’s prime minister lauds country’s burgeoning chip hub status as Infineon opens new plant | CNBC
- Govt targets RM500bil investments for National Semiconductor Strategy | New Straits Times
- Outlook and Policy in 2024 – The Ringgit in Perspective | Bank Negara Malaysia – Central Bank of Malaysia