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Retailers fear current weakness in consumer spending

RETAIL sales typically slow in the second quarter of the year as consumers take a breather from spending after the festivities in the first quarter. As such, when retailers say their sales fell short of expectations during the two major festive periods so far this year, it is time to pay attention. 

Ordinarily, following the lull in the second quarter, the cycle then picks up in the third and continues until it peaks in the fourth, when retailers hope to end the year stronger than the previous year. 

Will this be the case this year given the weak ringgit and the planned fuel subsidy rationalisation up ahead even though, on the flip side, the 1.4 million strong civil service is set to enjoy a big pay rise at year end? 

Consumer spending during the recent Hari Raya season — a key barometer for retailers — was a letdown. It was the same for the Chinese New Year celebrations earlier in the year. 

“Consumer sentiment is not strong this year. There was average and selective spending by consumers during Chinese New Year and Hari Raya. Even some segments of retail, like restaurants, voiced out that they had seen a drop in consumer spending,” says a spokesman for the Malaysia Retail Chain Association (MRCA). 

The Malaysia Retail Industry Report forecasts retail growth at 4% this year,  with the biggest expansion of 7.1% taking place in 1Q2024 on account of the Chinese New Year festivities and the month-long school holiday from February to March. The actual data for the quarter have not been released yet. 

Truth be told, retailers say, even though the Covid-19 pandemic is behind us, the industry is still not enjoying the kind of consumer spending that was seen before the pandemic. 

Consumer spending, or private consumption, plays a crucial role in driving the economy. In a scenario where consumers are confident of economic prospects and job security, the chances are that the purse strings will loosen and the retail industry will flourish. The opposite is also true when consumer confidence falters over the economy and poor job prospects lead to tighter purse strings. 

Tepid consumer spending is apparent in the fashion subsector, says Malaysia Retailers Association (MRA) president Datuk Andrew Lim. 

“If we just look at the fashion industry, it is a 20% decline across the board now compared to before the pandemic. I’m talking about the number of transactions that have declined, while sales revenue may continue to be the same or stronger,” he elaborates. 

“Even among the traders catering to the B40 group, they said sales were poor for Raya, about 20% less than a year ago,” he adds, noting that it was likely due to inflation. 

This begs the question of whether wage growth is catching up with the rising cost of living. For the majority of the population, the answer is obvious, given the lighter wallets today. 

A look at retail sales and volume data shows that these have been on the decline since June 2022. While the latest available retail sales data saw a 5.8% increase in February this year, indicating a five-month high, retail sales value only grew 0.7% on a monthly basis. 

“The larger slowdown trend is likely due to the fading of growth boosts from base effects and pent-up demand from the lifting of Covid-related restrictions, and while the February 2024 figures have proved optimistic, the longevity of this recovery will require further monitoring,” BMI Country Risk & Industry Research said in an April 23 report. 

EPF’s flexible account could spur consumer spending 

In the Malaysian Institute of Economic Research’s (MIER) 4Q2023 report on consumer sentiment, its Consumer Sentiment Index (CSI) rebounded from a low of 78.9 points in 3Q2023 to 89.4 during the quarter in review. While the CSI had rebounded from a recent year low, it is worth noting that it is still below the average of 96.5 points from 2005 to 2023. 

“While the results of this CSI have demonstrated an uptick quarter on quarter compared to the historically low results from 3Q, it is clear that consumer sentiment remains pessimistic,” MIER said in the report. 

It also noted that consumer expectations in terms of their spending do not seem to have taken a significant hit, which should provide policymakers hoping to see strong economic growth in 2024 with some optimism. 

Will the recent introduction of a flexible account by the Employees Provident Fund (EPF) help to boost consumption? 

Some quarters believe that the EPF flexible account withdrawals could end up pushing private consumption growth beyond Bank Negara Malaysia’s 5.7% forecast for 2024. 

“There is a good reason to be optimistic [that it might overshoot on the forecast]. The EPF flexible account is rather generous and could be an added upside to private consumption growth,” says CGS International Securities economist Nazmi Idrus. 

However, he cautions that the introduction of the flexible account could be in preparation for the pain ahead, especially when the subsidy rationalisation is put in place as intended. 

“Regardless, we think with everything combined, it should be net positive for consumption because the expected cash handout should offset the impact from the subsidy rationalisation,” says Nazmi, whose private consumption forecast is 6.1% year on year. 

UOB Global Economics and Market Research’s senior economist for Malaysia Julia Goh has kept her private consumption forecast at 5.5%. She says the EPF withdrawals, positive labour market conditions, targeted cash assistance and civil servant wage adjustments in December 2024 are all notable drivers for private consumption. 

Nevertheless, there are nuances to these, she highlights. 

“Based on a study we did back in 2022, we concluded that normalised growth for private consumption is just above mid-single-digit growth. This comes after taking into consideration higher incomes and cash aid to counter the headwinds of rising costs,” says Goh. 

“Hence, what’s important is not just the potential upside growth in a short span of a few months but demand remaining sustainable and robust in the medium term owing to fundamental drivers like demographics, labour and income growth at various levels.” 

She adds that in forecasting consumption, one factor to consider is what the withdrawals are for, whether it is for coping with the higher cost of necessities or for discretionary spending.

“Withdrawal patterns during the height of the pandemic compared to current conditions, when the economy is technically in full employment, should be different with fewer withdrawals expected now.” 

Similarly, retailers opine that the flexible account withdrawals will boost consumer spending only marginally and do not expect it to benefit all retail segments. 

“Current consumer concern is on managing the high cost of living where spending will be mostly concentrated,” says the MRCA spokesman, who observes that parents and first-time home buyers could choose to spend whatever funds available on their children’s education or use the money as a deposit for a home purchase — in other words, opting for priority spending. 

“Although there is a general view that the EPF flexible account will create a surge in consumer spending that will likely bolster the overall economy, we do not see this trend materialising speedily, even with this so-called booster,” adds the spokesman. 

Retailers need a boost 

Retailers have said the main challenges in 2024 are rising costs, which have come from multiple fronts — utilities, manpower, higher commodity prices, currency depreciation and even new tax policies. 

Suffice it to say, the fuel subsidy rationalisation programme is one that will be closely watched by the retail industry because of the direct impact it will have on the industry, whether in terms of sales revenue or from a cost perspective. 

MRA’s Lim says one way to boost Malaysia’s retail industry is to encourage foreign tourists to visit the country. 

It was reported that Malaysia anticipates tourist arrivals to reach 27.3 million this year, with an expected income of RM102.7 billion. In 2023, the country recorded 20.1 million tourist arrivals and generated RM71.3 billion in tourism income. 

Lim opines that the number of tourist arrivals so far this year is not as strong as before the pandemic. More importantly, high-net-worth visitors have not come back in droves. 

“We will definitely welcome tourists of all kinds, but the principle that should be adopted by the government is that anything that promotes high-end tourism is good,” he says, adding that the luxury market in Malaysia is not comparable with that of Dubai or even Singapore. 

The desire for visitors with larger wallets is understandable as they have more spending power than the average tourist. 

MRA is strongly against the now postponed high value goods tax, contending that it would further dampen Malaysia’s already weak luxury segment. 

“The retail industry in Malaysia cannot rely just on the spending of the 30 million population we have in the country. We need tourist dollars as well to spur the sector,” says Lim. 

He strongly believes that the government should expedite infrastructure projects that are related to the tourism sector so as to give the country a chance to become a leading Asian shopping paradise. It would be easier to make a good impression on foreign tourists if entering and travelling around the country is made seamless with good accessibility and connectivity. 

For now, retailers are wary of consumers’ spending power and what is in store for them in the months ahead. Nevertheless, a sliver of hope remains in the mid-year mega sale, which makes its return after the pandemic, and the throng of foreign tourists who may land on Malaysian shores to help boost retail sales. 


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