THE pace of economic activity in Malaysia has been accelerating since the second half of 2023. The Malaysian economy grew at an annual rate of 3.3% in Q3 2023, 3% in Q4 2023, and 3.9% Q1 2024.

The advance reading of the Q2 2024 figure indicates a significant jump, with an annual growth rate of 5.8%. This has understandably created a sense of optimism about the strength of the Malaysian economy.

Financial markets and private sector economists, particularly those in commercial banks, closely monitor these figures, as GDP figures provide important insights into the economy’s cyclical position, inflationary pressures, and the likely response from the central bank.

While this strong economic growth figure is certainly welcome, I would like to caution readers from two perspectives.

First, these advance figures are preliminary and subject to revisions-often substantial ones-as more data becomes available.

It is common for the Department of Statistics Malaysia (DOSM) to adjust these estimates as they refine their data. This practice is not unique to Malaysia; it is standard in every country.

Second, indeed, GDP figures matter greatly for the livelihoods of ordinary Malaysians.

However, the long-term prosperity of a country depends on whether such strong growth rates can be sustained over an extended period without triggering inflationary pressures or other economic imbalances.

What truly matters in the long run is the economy’s trend growth rate. Estimating this trend growth rate is challenging, as it is unobserved and subject to considerable uncertainty.

Therefore, it is important to ask if the 5.8% growth rate is within the range of sustainable growth.

In other words, can the Malaysian economy produce this rate of growth year after year for a considerable period of time?

Malaysia is a country of huge potential and this rate of growth is probably achievable. However, it is not simple.

My assessment is that Malaysia’s trend growth rate is likely in the range of 4–5.5%, which is a wide range in itself.

In arriving at this figure, I looked at the growth rate since 2014,which is significantly slower than the previous ten years.

It is important to understand the source of this slowdown that started even before COVID-19.

Achieving consistent growth rates close to 6% year after year is indeed possible but might prove challenging without significant reforms to enhance the economy’s productivity and competitiveness.

Furthermore, the global economic environment is becoming increasingly uncertain, with many head winds.

Recession fears are growing in the United States, and China’s contribution to global growth is not what it once was.

These external factors could pose risks to Malaysia’s economic outlook. In short, for financial sector economists, the latest GDP figure offers much to discuss.

However, for policymakers and the broader public, the real challenge lies in sustaining such growth rates over time. That is something we all hope for. 

Ozer Karagedikli is a Professor of Practice and the Director of the Central Banking Research Centre at the Asia School of Business Kuala Lumpur.

Originally published by Focus Malaysia.