[MALAYSIA] As Malaysia approaches 2025, economists and financial experts are projecting a notable uptick in inflation rates, coupled with accelerated economic growth. This forecast is based on a combination of factors, including wage increases, robust economic expansion, and the implementation of new budget measures. The anticipated changes in the economic landscape present both opportunities and challenges for businesses, consumers, and policymakers alike.
Factors Driving Inflation Growth
Wage Increases and Economic Expansion
One of the primary drivers of the projected inflation growth is the expected increase in wages across various sectors. Geoffrey Williams, founder and director of Williams Business Consultancy Sdn Bhd, highlights this factor, stating, "We will also see an exchange rate effect and perhaps some policy effects from higher civil service pay, minimum wage and the RON95 subsidy rationalisation in the second half of 2025". The minimum wage hike to RM1,700, scheduled for February 1, 2025, is expected to play a significant role in boosting consumer spending power.
Furthermore, Williams projects "excess economic growth of 5% for 2025, which is above the underlying growth potential". This robust economic expansion is likely to contribute to inflationary pressures as demand for goods and services increases.
Budget 2025 Measures
The recently announced Budget 2025 includes several measures that are expected to impact inflation rates:
Increase in excise duty on sugar-sweetened beverages from January 1, 2025
Expansion of the sales tax on non-essential goods
Broadening the scope of the service tax from May 1, 2025
Retargeting of RON95 subsidies to exclude foreigners and top 15% consumers by mid-2025
CIMB Treasury and Markets Research notes that these measures will likely contribute to an upward bias in the 2025 inflation outlook.
Projected Inflation Rates
While experts agree that inflation is set to rise, there are varying projections for the exact rate:
Geoffrey Williams expects inflation to remain in the 2% to 2.5% range, or possibly below.
CIMB Treasury and Markets Research maintains its inflation forecast of 2.6% for 2025.
It's important to note that these projections allow for potential upward adjustments due to tax measures and wage increases.
Impact on Consumer Behavior and the Economy
The anticipated rise in inflation is expected to have significant effects on consumer behavior and the broader economy:
Increased Consumer Spending
TA Research points out that "the higher minimum wage leads to increased disposable income for low-wage earners, which boosts consumer demand". This increase in spending power is likely to stimulate economic activity across various sectors.
Demand-Pull Inflation
The research firm also notes that "As workers have more spending power, they are likely to spend more on goods and services, creating greater demand within the economy. This increased demand can result in demand-pull inflation, where the rising consumer demand outstrips the supply of goods and services, pushing prices higher".
Monetary Policy Implications
Given the projected inflation growth and strong economic momentum, experts are closely watching potential monetary policy responses:
Overnight Policy Rate (OPR)
CIMB Treasury and Markets Research expects Bank Negara to maintain the overnight policy rate (OPR) at 3% in the near term, citing "inflation risk, as well as solid growth momentum that is underpinned by a stronger-than-expected advanced third quarter 2024 (3Q24) gross domestic product estimate of 5.3%".
Stable Monetary Policy
MIDF Research suggests that the current OPR of 3% is likely to be maintained throughout 2024 and into 2025, as it is "deemed to be normal for Malaysia and supportive of sustainable economic growth".
Short-Term Inflation Outlook
While the focus is on 2025's projected inflation growth, economists also provide insights into the short-term inflation outlook:
Remainder of 2024
Williams expects inflation to remain stable for the rest of 2024, stating, "There is nothing that should cause a spike in inflation in 4Q24. The strength of the ringgit might have an effect but this will be spread out over many months. So we expect inflation around or below 2% in each month and overall, at the same level for the year".
Revised 2024 Forecast
MIDF Research has revised its 2024 inflation forecast lower to 2% from 2.3% previously, citing the targeted RON95 subsidy rollout scheduled for mid-2025.
Challenges and Opportunities
The projected higher inflation growth presents both challenges and opportunities for various stakeholders:
Challenges
- Maintaining price stability while supporting economic growth
- Ensuring that wage increases translate to improved living standards
- Managing potential disparities between income growth and inflation rates
Opportunities
- Increased consumer spending driving economic activity
- Potential for businesses to expand and innovate in response to higher demand
- Opportunity for policymakers to fine-tune economic strategies
As Malaysia prepares for a potentially higher inflation environment in 2025, stakeholders across the economy must remain vigilant and adaptable. The projected growth in both inflation and the broader economy signals a dynamic period ahead, with implications for consumers, businesses, and policymakers alike.
While the exact trajectory of inflation remains subject to various factors, including global economic conditions and domestic policy implementation, the consensus among experts points to a moderate increase. This outlook underscores the importance of balanced economic management to ensure that growth remains sustainable and benefits are widely distributed across Malaysian society.
As the situation evolves, continued monitoring and analysis will be crucial for making informed decisions and navigating the changing economic landscape. Malaysia's ability to manage this period of higher inflation and growth will be key to its long-term economic prosperity and stability.
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