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PETALING JAYA: While the domestic economy is showing strong momentum, there are emerging headwinds that have the potential to curtail growth in the second half (2H) of the year, according to economists.

RAM Rating Services Bhd senior economist Woon Khai Jhek, who is projecting gross domestic product (GDP) growth of 5.8% this year from 3.1% last year, said the biggest challenge for the economy would be the rising prices of commodities and production inputs.

This has the potential to dampen business activities and investor appetite, given the higher cost of doing business, according to Woon.

He said there might be some weakening of private consumption demand as well, if such cost increases are passed down to consumers.

“The marked rise in food prices will be especially felt by consumers given that food constitutes around 30% of a typical household’s expenditure. The reprioritisation in consumption demand due to weaker purchasing power would weigh on Malaysia’s recovery momentum in the second half of the year,” he told StarBiz.

RAM Rating Services Bhd senior economist Woon Khai Jhek, who is projecting gross domestic product (GDP) growth of 5.8% this year from 3.1% last year, said the biggest challenge for the economy would be the rising prices of commodities and production inputs.

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One key downside risk is the possibility of the global economy entering a deep contraction, as it deals with the spillover effects from the Russia-Ukraine war and the ensuing surge in inflation and supply-chain disruption.

“A deep contraction in the US economy due to the aggressive tightening of monetary policy to combat inflation will be particularly concerning, as the country accounts for around 10% of Malaysia’s exports.”

Woon added that a steep slowdown in China as a result of its strict Covid-19 containment policy, is also a notable downside risk.

“China constitutes 15% of Malaysia’s overall exports. Volatile capital flows because of the sharp tightening of global monetary conditions from the rapid rise in interest rates, will introduce the risk of financial market instability. This may in turn dampen fundraising and investment appetite.”

MARC Ratings Bhd chief economist Firdaos Rosli said the second half would involve the “pains” in maintaining the economic growth momentum from the first half of the year, as the downside risks emerge from external and internal fronts.

“While external pressures see no signs of abatement, the sluggish labour market recovery, rising business and financing costs and narrowing fiscal space will make growth in the second half more difficult. Uncertainties related to the next general election will not help to fuel the economy.