Malaysia's economy grew in Q4 2023, with an optimistic outlook for 2024

In Q4 2023, Malaysia's economy expanded by 3%, propelled by strong household spending and investment activity, despite lackluster exports. Despite facing challenges like subdued external demand and inflationary pressures, the outlook for 2024 remains positive. This is supported by robust domestic expenditure and the anticipated resurgence in external demand, which will sustain ongoing growth.

In Q4 2023, Malaysia’s economy expanded by 3% YoY, sustaining its growth trend but slipping from 3.3% in the preceding quarter. The central bank attributed this slowdown to a demanding external landscape, pointing to slower global trade, geopolitical tensions, tighter monetary policies, and a global tech downturn.

Graph showing Malaysia's YoY GDP Growth (%, 2020 – 2023)

Exports stayed restrained as a result of persistent sluggishness in external demand amidst increased imports.  Exports experienced a 6.3% decline, while imports decreased by 2.9% in Q4. Consequently, net exports registered a further decline of 35.6%, compared to a 22.7% decrease in the previous quarter. However, the reopening of China’s borders can serve as a counterbalance to external uncertainties stemming from potential recessions in the European Union (EU) and the United States.

Headline inflation declined further, reaching 1.6% in the quarter, down from 2.0% in the previous term, partly due to reduced fresh food prices. Besides that, the decrease in core inflation was primarily influenced by a reduction in services sub-segments, notably food-away-from-home and repair and maintenance of personal transport. The pervasiveness of inflation continued to decrease, with the share of Consumer Price Index items experiencing monthly price increases moderating to 36.3% during the quarter, down from 40.8% in Q3 2023.

Notably, household spending received a boost from a reduction in cost pressures and improving labor market conditions with unemployment rate returning to pre-pandemic levels at a remarkable low of 3.3%. Household spending, constituting 58.9% of GDP, expanded by 4.2% in Q4 2023, driven by increased spending on transport, food, non-alcoholic beverages, and housing, water, electricity, gas, and other fuels. Meanwhile, the growth in investment activity was bolstered by the progressive realization of multi-year projects and the expansion of capacities by various firms.

The commodities sector experienced robust growth, supported by increased oil and gas production and expansion in the agriculture sector amidst enhanced labor availability. The services sector notably contributed positively, growing at a rate of 4.2%, adding to the momentum. While growth was observed across all major sectors in the Q4, the construction sector saw its expansion slow to 2.5% YoY, down from 7.2% in the previous quarter. Additionally, the manufacturing sector also remained subdued due to persistent weaknesses in the electrical and electronics industry. In detail, the manufacturing sector contracted by 0.3% in the Q4, maintaining the decline observed in the previous period’s 0.1% downturn.

Graph showing Malaysia Manufacturing PMI (2022-2023)

Overall, Malaysia’s economic performance in 2023 showcased a mixture of highs and lows. Malaysia’s GDP growth in 2023 mirrors the moderate growth observed in other ASEAN countries. The central bank maintained its benchmark overnight policy rate at 3.0%, pointing to enhancements in domestic demand and labor market conditions. It anticipates that 2024’s growth will be buoyed by a sturdier domestic spending landscape and an uptick in external demand, particularly in the technology sector.

The labor market improved with favorable policy reforms

Malaysia's labor market strengthened in Q4 2023, with more jobs and fewer unemployed. The labor force reached 16.97 million, and participation remained at 70.1%. Supported by domestic demand, policy reforms, and infrastructure projects, further recovery is expected. Increased foreign tourism and a global tech cycle upturn will likely drive growth in 2024.

Malaysia in Q4 2023 saw a robust labor market performance, indicating encouraging economic activity. The number of employed individuals continued to climb, signaling positive trends, while unemployment rates showed a decline. The labor force expanded slightly by 0.1%, reaching a total of 16.97 million people, with a labor force participation rate of 70.1%. The stable labor market outlook is primarily upheld by domestic demand, reinforced by the resurgence of tourism activities, continuous foreign direct investment (FDI) inflows, the potential turnaround in international trade, ongoing infrastructure projects, all contributing to the maintenance of job opportunities.

Graph showing Malaysia's Unemployment Rate (% of Labor Force)

The Malaysian government is set to launch a new program aimed at boosting wages for low-income workers amidst increasing living expenses and growing inequality within the Southeast Asian nation. The Progressive Wage Policy, designed to incrementally raise wages for employees according to their skills, experience, and performance, is scheduled to commence in June 2024. The pilot project will engage 1,000 companies in its implementation. Strategic policy reforms, including the forthcoming progressive wage mechanism, along with the rigorous implementation of national blueprints and job-related initiatives outlined in Budget 2024 , are anticipated to bolster the labor market recovery in both the short and medium terms. Budget 2024, also known as the second Madani Budget, mirrors the government’s steadfast commitment to enhancing both the national economy and the welfare of its citizens. At USD 89.8 billion, the Budget 2024 is the largest supply bill to be tabled.

The projected increase in foreign tourist arrivals and the anticipated recovery in the global tech cycle serve as further catalysts for growth and the labor market’s rebound in 2024.

Manufacturing sector's capacity utilization declined YoY yet gained back to Q1-2024 level

Rolled metal in a warehouse

In Q4 2023, Malaysia's manufacturing sector’s capacity utilization decreased to 79.8%. Specific sub-sectors, such as petroleum, chemical, rubber, and plastic products, experienced significant declines, while others, like non-metallic mineral products, basic metals, and fabricated metal products, reached peak performance.

In Q4 2023, the manufacturing sector in Malaysia operated at a capacity of 79.8%, showing a YoY decrease of 0.4%. The decline in production capacity was driven by factors such as subdued demand, inadequate material supply, and the need for repairs and maintenance of machinery and equipment.

Graph showing Manufacturing Industry Capacity Utilization (%, 2021 – 2023)

The diminished capacity utilization within the manufacturing sector can be chiefly attributed to declines in specific sub-sectors: petroleum, chemical, rubber, and plastic products experienced a notable decrease of 4.2%, while electrical and electronic products saw a decline of 0.5%. In terms of manufacturing industry capacity utilization by sub-sector, the manufacture of non-metallic mineral products, basic metals, and fabricated metal products led the pack with the highest capacity utilization rate at 83.2%, marking a significant YoY increase of 4.5%. Following closely behind was the transport equipment and other manufacture sub-sectors, which achieved a capacity utilization of 82.2%.

Graph showing Manufacturing Industry Capacity Utilization by Sub-sector (%, Q4 2023)

Six states have demonstrated a capacity utilization exceeding the national rate. These states include Labuan, which recorded the highest capacity utilization at 95.6%, followed by Negeri Sembilan, Pahang, Selangor, Melaka, and Johor. Besides that, six states have experienced a YoY decrease in capacity utilization, consisting of Kedah, Kelantan, Melaka, Perlis, Terengganu, and Sarawak.

Graph showing Manufacturing Industry Capacity Utilization by State (%, Q4 2023)

In general, there was a notable decrease in the capacity utilization of export-oriented industries in 2023, dropping by 2.1% YoY to 78.3%. Meanwhile, domestic-oriented industries showed a positive trend, with a 1.1% YoY increase, reaching a capacity utilization rate of 81.4%.

Government's development initiatives boost construction sector growth potential

The construction sector continued its upward trajectory for the seventh consecutive quarter, driven primarily by an 18.0% increase in the Civil Engineering sub-sector. This growth, albeit with mixed performances across sub-sectors, is underpinned by the government's expansionary fiscal policies and ongoing projects in both the private and public sectors.

Construction in Malacca, Malaysia

In the seventh successive quarter, the construction sector sustained its upward momentum, registering a 6.8% YoY increase to attain a value of USD 7.2 billion in completed works during Q4 2023. This performance marks a continuation from a 9.6% growth in the preceding quarter. The growth is significantly supported by the government’s commitment to expansionary fiscal spending, alongside sustained progress in initiatives spearheaded by both the private and public sectors.

Graph showing Value of Work Done (Billion USD, 2020 – 2023)

The principal driver of the constructor sector’s expansion in Q4 2023 was the Civil Engineering sub-sector, which experienced a significant 18.0% YoY increase, a slight enhancement from the 17.1% growth observed in Q3 2023. Conversely, the pace of growth in the Residential Buildings and Special Trade Activities sectors decelerated to 2.3% (down from 7.9%) and 0.3% (down from 16.2%), respectively. Notably, the Non-Residential Buildings sub-sector encountered a downturn, with a 1.9% contraction, a more pronounced decline compared to the 0.7% reduction recorded in Q3 2023.

Chart showing Value of Work Done by Sub-sector (Q4 2023)

41.9% of the construction sector’s work done value was attributed to civil engineering. This segment was predominantly led by the construction of roads and railways, accounting for USD 1.6 billion, and utility projects, contributing USD 1.1 billion. On the other hand, special trade activities, contributing 9.6% to the total value, were primarily driven by electrical installation, plumbing, heating, and air-conditioning installation, and site preparation activities.

The construction sector is anticipated to maintain its upward trajectory, projecting an annual growth rate of 4.4% in 2024. This optimism is largely fueled by the financial allocations outlined in the 2024 Budget, as announced by Prime Minister Anwar Ibrahim in October 2023. The budget earmarks a total expenditure of USD 89.8 billion for 2024, marking a 1.5% increase from the 2023 Budget. It allocates USD 69.3 billion for operating expenses and USD 20.5 billion for development expenses. Looking ahead to the period from 2025 to 2027, the construction industry is poised for an average annual growth rate of 5.8%. This growth is expected to be propelled by investments in substantial transport, industrial, and renewable energy projects. Additionally, the government’s initiative to implement the Public Private Partnership (PPP) 3.0 model, a refined mechanism designed to finance infrastructure projects under the 12th Malaysia Plan (12MP) spanning from 2021 to 2025, is set to further stimulate the sector’s expansion.

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.

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    Economic and Financial Developments in Malaysia in the Fourth Quarter of 2023 – Bank Negara Malaysia

    Malaysia’s annual GDP misses target at 3.7% amid weak exports – Nikkei Asia

    Malaysia’s economic growth slows to 3% y-o-y in 4Q, economists flag external risks ahead – The Edge Malaysia

    Malaysia’s economy likely expanded in Q4 but outlook cloudy – Reuters

    Malaysia’s economy is expected to moderate 4% this year – Citi – Malaysia Gazette

    Malaysia’s 2023 GDP growth aligns with Asean nations –

    Malaysia Manufacturing PMI – FX Empire

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    DOSM: Malaysia’s labour force improves in October 2023, unemployment rate remains at 3.4% – The Edge Malaysia

    Malaysia’s labour market on track to full recovery in 2024, economists say – The Edge Malaysia

    Malaysia plans new wage scheme for low-income workers – Vietnam Plus


    Manufacturing industry at 79.8% operating capacity in 4Q2023 — DOSM – The Edge Malaysia

    Manufacturing industry at 79% operating capacity in Q4, down by 0.4% –

    Manufacturing Industry Capacity Utilisation Statistics, Fourth Quarter 2023 – Department of Statistics Malaysia

    Construction Statistics, Fourth Quarter 2023 – Department of Statistics Malaysia

    Value of construction activities in Malaysia as of the fourth quarter 2023, by type – Statista

    Construction sector poised to register stronger growth in Q4 –

    Malaysia Construction Industry Report 2023: Output is Expected to Grow by 6.6% in Real Terms in 2023 – Size, Trends Analysis by Sector, Competitive Landscape and Forecasts 2018-2022 and 2023-2027 – – Market Watch