KUALA LUMPUR: Malaysia's economy grew slower than expected in the fourth quarter of 2023 as exports remained subdued, the central bank said on Friday, though it expects growth to improve this year on the back of a recovery in external demand.

Bank Negara Malaysia (BNM) said the 3% year-on-year growth in gross domestic product during the October-December period was driven by improving labour market conditions and easing cost pressures.

"Growth in 2024 will be driven by resilient domestic expenditure and improvement in external demand," the central bank said in a statement.

The fourth quarter reading was below advanced estimates released on Jan. 19 by the Statistics Department and analysts' forecast in a Reuters poll of a 3.4% expansion.

It was also softer than the 3.3% expansion in the previous quarter. On a quarter-on-quarter seasonally-adjusted basis, Malaysia's economy contracted 2.1%, compared to a 2.6% rise in the third quarter.

Full-year 2023 economic growth was 3.7%, below the government's projection for a 3.8% expansion and a sharp drop from a 22-year high of 8.7% in 2022.

The Southeast Asian economy's growth moderated due to a challenging external environment of slower global trade, geopolitical tensions and tighter monetary policies, BNM said.

Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia, said the slowdown reflected broader global trends with Japan and Britain slipping into recession at the end of last year.

External demand will be the key risk factor affecting the Malaysian economy, he said, with buoyant consumer spending slowing on concerns over the rising cost of living.

"(Malaysia) is an open economy and therefore any gyration in the external demand will be effectively transmitted to our exports and the manufacturing sector."

The government and central bank expect economic growth of 4%-5% in 2024.

Consumer prices declined 1.6% during the fourth quarter of 2023, while full year headline inflation fell to 2.5% from 3.3% in 2022, BNM said.

The central bank held its key interest rate unchanged at 3.00% last month amid moderating inflation, and warned of risks to growth due to weaker-than-expected external demand and declines in commodity production. (Reporting by Danial Azhar and Rozanna Latiff; Editing by Martin Petty & Shri Navaratnam)