Chapter 1: Economic, Monetary and Financial Developments in 2024

2024: Malaysian economy recorded a stronger growth, driven by robust domestic demand and rebound in trade

In 2024, global growth expanded at a steady pace. Domestic demand was sustained in major economies, due to resilient labour market conditions and easing monetary policy (Chart 1.1). Global trade rebounded, supported by both the electrical and electronics (E&E) and non-E&E segments. Headline inflation continued to soften, albeit at a varied pace across economies. As a result, central banks began easing monetary policy at different points, reflecting the differences in demand and inflation dynamics across countries.

In advanced economies, growth was sustained, bolstered by robust labour markets and a rebound in global trade. The US economy experienced solid growth, driven by strong private consumption and investment. Positive labour market conditions and healthy household balance sheets continued to underpin consumer spending. Meanwhile, private investment was fuelled by firms focusing on productivity enhancements, such as strengthening supply chain resilience. Investment activity also benefitted from policy incentives such as the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act. Although monetary policy stance remained restrictive, the effects on households’ and businesses’ net interest payments were partly contained given the prevalence of long-duration fixed liabilities, excess savings, and healthy corporate balance sheets. In the euro area, growth improved as the effects of the conflict in Ukraine receded. The bloc addressed the previous year’s gas shortages by enhancing energy security through increased regasification capacity, leading to lower LNG prices. In addition, resilient labour market conditions supported consumer spending, while exports were buoyed by stronger external demand. There were nevertheless growth divergences within the euro area, with France and Spain leading the recovery, while Germany remained in contraction amid sluggish manufacturing activity.^[1]

China’s economy expanded at a slower pace, weighed by continued sluggishness in the property market and muted consumer sentiments. In 2023, China’s growth was primarily driven by the temporary uplift from the post-lockdown reopening. However, by 2024, the postpandemic boost had largely dissipated, and the economy no longer benefitted from these base effects despite recovering external demand. The ongoing downturn in the property market, coupled with below-average growth of real disposable income, continued to weaken consumer confidence and spending. The key impetus to growth stemmed from export recovery and policy support, from both fiscal stimulus and low interest rates.

Global trade improved, supported by growth in both the E&E and non-E&E segments (Chart 1.2). The ongoing global technology upcycle continued to drive E&E growth, while non-E&E segments, such as machinery and equipment (M&E), benefitted from increased investments in emerging areas such as digitalisation and green energy. In 2024, semiconductor sales increased by 19% year-over-year, mainly driven by the logic and memory segments. International tourist arrivals nearly reached 2019 levels, with tourism receipts in many countries surpassing pre-pandemic figures. Although supply chain conditions improved compared to 2023, challenges remained. Early in the year, the escalation of geopolitical tensions in the Middle East led to a rerouting of trade from the Red Sea to the Cape of Good Hope. This was followed by congestion in East Asian ports due to the clustering of arrivals, adverse weather, and the front-loading of trade. However, as these issues subsided in the latter half of the year, shipping conditions improved, supporting the recovery of trade in 2024.

Global headline inflation moderated (Chart 1.3), primarily due to declining commodity prices and improved supply chain conditions. The pace of disinflation, however, varied across advanced economies, reflecting country-specific factors. As a result, major central banks eased monetary policy at different times and to varying degrees, in contrast to the synchronised tightening observed in 2022. Oil prices declined in 2024, attributed to slower-than-anticipated demand growth in China and increased production from non-OPEC countries, notably the United States. Shipping prices initially rose in the first half of the year, due to the aforementioned rerouting of trade. However, as the intensity of these eased, shipping rates trended downward in the latter half of the year. Underlying inflation, as measured by core inflation, remained persistent. Although core goods inflation continued to ease, services inflation remained elevated. In part, this reflected resilient wage growth and persistence in selected inflation components, such as shelter services. Advanced economies remained on a disinflationary path, while inflation in emerging market economies remained below average. In China, inflation stayed below historical averages due to lower food prices, subdued consumer spending amid weak sentiments and price competition among car producers.

Global financial conditions transitioned from being relatively tight to more accommodative, as inflation pressures started to abate in the second half of 2024. This shift was largely driven by the monetary policy decisions of major central banks, particularly the US Federal Reserve (Fed), which had a prominent influence on global financial market sentiment (Chart 1.4). As global financial conditions loosened, investors adjusted their portfolios and reallocated capital flows in search of higher returns.

At the beginning of 2024, global financial markets experienced heightened volatility as investors reassessed the monetary policy outlook of major central banks, particularly the trajectory of the Fed’s policy rate. While some central banks in advanced economies had begun cutting interest rates ahead of the Fed, global financial conditions remained tight amid persistently elevated inflation. Although inflationary pressures were gradually easing, inflation rates remained above central banks’ targets in most advanced economies. The Fed’s delay in implementing the planned rate cuts, relative to other central banks, widened the interest rate differentials between the US and the rest of the world. This divergence continued to favour portfolio flows into the US, strengthening the US dollar against most currencies (Chart 1.5). Consequently, emerging market currencies, including the ringgit, faced further pressure. Additionally, heightened geopolitical risks arising from escalating tensions in the Middle East, further contributed to financial market volatility throughout the year.

From July 2024, global financial conditions began to ease as financial market participants increasingly anticipated an imminent rate cut by the Fed’s September Federal Open Market Committee (FOMC) meeting. The shift in financial market expectations was driven by softer US labour market and inflation data, which led to a more dovish monetary policy outlook. The Fed’s decision to cut the policy rate resulted in a decline in the 10-Year US Treasury (10Y UST) yields and a narrowing of interest rate differentials between the US and the rest of the world. Consequently, the US dollar weakened against major and emerging market currencies.

Despite the ongoing easing cycle, uncertainties surrounding the November US election introduced pockets of tightening pressure on global financial conditions in the fourth quarter. Following the election outcome, global bond yields rose, while the US dollar strengthened against most currencies. This was driven by financial market expectations for pro-growth US policies and a higher fiscal deficit under the new US administration, which are both deemed to be inflationary for the US. This resulted in increased financial market volatility alongside a partial reversal of earlier portfolio inflows into emerging markets, as investors adjusted their expectations towards a more gradual Fed easing path for 2025.

Domestic financial markets were affected by global factors, but spillovers to financial intermediation remained contained

Developments in Malaysia’s domestic financial markets in 2024 were largely shaped by external events, particularly shifts in global monetary policy. The resulting periodic volatility in portfolio flows influenced domestic financial conditions primarily in terms of exchange rate fluctuations. Notwithstanding this, Malaysia’s resilient financial system, coupled with positive macroeconomic prospects amid robust domestic demand and ongoing structural reforms, helped cushion adverse impacts from global financial market spillovers and maintain positive investor confidence.

In the bond market, Malaysian Government Securities (MGS) yields were broadly stable, in line with regional peers, amid financial market participants’ reassessment of policy rate reductions by the Fed. However, domestic yields declined in the second half of the year as foreign inflows into the bond market increased, driven by global monetary policy easing. Nonetheless, bond yields trended higher towards the end of the year, in line with global yield movements amid increased inflation expectations, particularly in the US. This was accompanied by a repricing for fewer US interest rate cuts in 2025. Overall, for the year, the 3-year MGS yield decreased by one basis point while the 5-year and 10-year MGS yields increased by 4 and 8 basis points, respectively (Chart 1.6). Over the course of the year, investors remained optimistic on the domestic market, evident through the total net non-resident inflows into debt securities, amounting to RM1.2 billion. This confidence was supported by favourable domestic economy prospects along with low and stable inflation, leading to attractive real yields and robust credit quality in the domestic bond market.

The domestic equity market delivered a strong performance and saw net inflows in 2024, supported by stronger economic growth alongside a stable political environment. The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rose by 12.9% (2023: -2.7%) to close the year at 1,642.3 points (Chart 1.7).

The implementation of national master plans^[2] amid the domestic investment upcycle underpinned prospects for stronger domestic corporate earnings. The rally was further fuelled by spillovers from inflow of data centres and global technology upcycle, benefiting the construction, utility and technology sectors. Overall, with net inflows of RM22.7 billion recorded in 2024 (2023: RM2.5 billion), foreign participation in the equity market increased to 19.7% (2023: 19.5%),^[3] reflecting growing confidence in Malaysia’s long-term growth prospects.

In the foreign exchange (FX) market, the ringgit experienced increased volatility throughout 2024, driven mainly by external factors. Early in the year, the US dollar’s strength – driven by shifting expectations on Fed’s policy and heightened geopolitical risks – exerted downward pressure on the ringgit. Starting February 2024, the Government and BNM took coordinated actions to promote a more balanced two-way flow in the FX market. These efforts included wide-ranging engagements with Government-Linked Investment Companies (GLICs), corporates and domestic institutional investors to encourage more consistent and timely repatriation and conversion of foreign earnings and overseas investment income. As a result, downward pressure on the ringgit eased amid a strong US dollar environment. Additionally, FX market liquidity improved, with daily average FX trading volumes rising to USD17.6 billion in 2024 from USD15.6 billion in 2023, alongside a narrower bid-ask spread in the ringgit exchange rate.

In July 2024, the ringgit rebounded against the US dollar amid growing expectations of a rate cut by the Fed. On the domestic front, investors’ optimism on positive economic prospects, underpinned by the stronger-than expected GDP growth in the second quarter of the year and the structural reform measures undertaken by the Government, also provided support to the ringgit. While the ringgit faced renewed depreciation pressures amid heightened uncertainties surrounding the November US election, it recorded an overall year-on-year appreciation of 2.7% against the US dollar. The ringgit was one of the few currencies in Asia to appreciate against the US dollar in 2024, besides the Hong Kong dollar, whilst other regional currencies experienced a depreciation. Of note, the ringgit also appreciated against other major and Asian currencies, including the Singapore dollar, Korean won, and Japanese yen, with an overall appreciation of 7.5% recorded on a nominal effective exchange rate (NEER) basis (Chart 1.8).

Notwithstanding the developments on the global front, spillovers to financial intermediation remained contained. Malaysia’s deep and liquid financial markets along with a sound banking system provided sufficient buffer against global volatility. Furthermore, BNM’s liquidity and FX operations ensured orderly market conditions. Following this, domestic credit growth remained robust, amid continued confidence in the economy’s strength. Financing conditions continued to be supportive, with sustained fund-raising activity in the capital market and steady bank credit flows. Overall, Malaysia’s financial system demonstrated resilience despite external challenges, supported by positive macroeconomic prospects and ongoing structural reforms.

The Malaysian economy recorded higher growth in 2024, driven by stronger domestic demand and a rebound in exports

In 2024, the Malaysian economy registered stronger growth of 5.1%, compared with 3.6% in 2023 (Chart 1.9). Of significance, the year was marked by an investment upcycle, representing the highest investment growth in a decade and surpassing pre-pandemic levels. The external sector also thrived, benefiting from the global technology upcycle. However, the economy was not without its challenges. Wage growth remained subdued, particularly in the manufacturing sector, following weak export performance in 2023. Additionally, the commodity sector encountered supply disruptions during the middle of the year. Despite these headwinds, the economy demonstrated resilience, reflecting the diversified nature of the economy.

Domestic demand continued to anchor growth, driven by improved household spending and stronger investment activity (Chart 1.10). Favourable labour market conditions, net wealth accumulation, and continued policy support underpinned the resilience of household spending. Despite moderate growth in nominal wages,^[4] labour market conditions remained positive as the unemployment rate declined further to below prepandemic levels. At the same time, the labour force participation rate reached a historic high of 70.6% in the fourth quarter of 2024. Household wealth improved, alongside strong domestic and foreign equity market performance. Withdrawals from the EPF Akaun Fleksibel starting in May 2024 and early incentive payments to civil servants and pensioners helped to partly cushion cost of living pressures. Meanwhile, targeted policy support, such as Sumbangan Tunai Rahmah, remained available to assist lower-income groups.

Following high project approvals in 2023, Malaysia is experiencing its third investment upcycle.^[5] The combined share of private and public investments rose from 20.1% of GDP in 2023 to 21.4% in 2024. The realisation of investment projects was evident particularly in the electrical and electronics (E&E), and information and communications technology (ICT) sub-sectors. This strong performance can be attributed to the expansion of semiconductor production capacity, as well as Malaysia’s emergence as a data centre hub in Southeast Asia. Of the manufacturing investment projects approved by MIDA since 2021, 84.5% have been implemented at various stages. The continued progress of large infrastructure projects in the public sector also provided further impetus to investment growth.

In the external sector, exports rebounded due to improving demand from key trade partners and positive spillovers from the global technology upcycle (Chart 1.11). In the first half of 2024, E&E exports remained in contraction, albeit at a reduced pace compared to 2023. This reflected Malaysia’s limited exposure to memory chips, one of the main drivers in the ongoing global technology upcycle.^[6] However, the pace of E&E exports picked up in the second half of the year, as the recovery in chip demand became more entrenched across segments related to Malaysia’s E&E export products. Non-E&E exports were bolstered by stronger investment activities in regional countries, increasing demand for exports of machinery and construction materials. Commodities exports posted modest growth, as higher palm oil and gas exports offset the contraction in crude oil exports.

Meanwhile, imports grew at a much faster pace (Chart 1.12), driven by stronger demand for capital and intermediate goods to support rising investments and trade. Intermediate imports rebounded, as manufactured exports recovered across both E&E and non-E&E products. Capital imports registered double-digit growth, fuelled by higher investment activities by domestic firms to expand production capacity. Consumption imports also recorded higher growth underpinned by improving household spending.

As imports grew faster than exports, the goods balance within the current account of the balance of payments narrowed. Notably, a significant portion of these imports was intermediate goods, which are essential for export production. Furthermore, the surge in capital imports is expected to enhance exports and the current account balance in the medium term.^[7] Meanwhile, the services account recorded a smaller deficit amid higher travel receipts. Tourist arrivals increased and reached 25 million persons in 2024, with travel receipts exceeding 2019 levels.^[8] The income account deficit widened, as a larger deficit in primary income had offset the improving secondary income balance. Overall, the current account surplus rose to 1.7% of GDP in 2024 (2023: 1.5%).

Notes

^[1] Germany GDP growth 2024: -0.2%; 2023: -0.3%

^[2] These included the New Industrial Master Plan 2030 (NIMP 2030), National Semiconductor Strategy (NSS), National Energy Transition Roadmap (NETR) and Twelfth Malaysia Plan (12MP).

^[3] These figures refer to the share of total market capitalisation held by non-residents.

^[4] The moderate growth in nominal wages was attributable to firms’ conservative wage-setting behaviour following lower revenue in the previous year, competing business priorities such as business expansions, and anticipation of government policy implementations including minimum wage revision.

^[5] The first investment upcycle took place in the late 1980s to 1997, while the second investment upcycle was from 2011 to 2015. This is discussed further in the box article ‘Deciphering Investment Cycles in Malaysia’.

^[6] Memory chips accounted for 8% of Malaysia’s semiconductor exports, as compared to 23% for global semiconductor exports. More detailed insights can be found in the box article ‘Malaysia’s Position in the Global E&E Value Chain and Prospects’.

^[7] For in-depth coverage, see the box article ‘Drivers of Malaysia’s Current Account of the Balance of Payments in the Post-COVID-19 Period’.

^[8] In 2024, travel receipts amounted to RM95.7 billion, which was 16.5% higher than 2019 levels (2019: RM82.1 billion).