Moderation in Malaysia's GDP growth may persist: Economists

Posted on 16 May 2016

Source: The Sun Daily
Bank Negara Malaysia (BNM) is confident that the Malaysian economy will perform better in the second half of the year, to achieve at least 4% full-year gross domestic product (GDP) growth, but economists caution that the moderation in growth, as seen in the first quarter numbers, may persist due to uncertainties in the external environment.

The country registered 4.2% GDP growth in Q1 2016, the slowest expansion since Q3 2009, due to external shocks to the economy and cautious spending by the private sector.

"Visibility is still not very certain for the second half to be better than the first half, especially as the external side is quite challenging at the moment. We've not really seen that the external side will stage a strong rebound in the second half, meaning it will continue to drag on the Malaysian economy," RHB Research economist Peck Boon Soon told SunBiz.

Peck, who is maintaining a 3.9% GDP growth projection for 2016, cautioned that lower investment conditions may trigger retrenchments and result in consumers holding back consumption.

At a press conference announcing the Q1 GDP results last Friday, newly appointed BNM governor Datuk Muhammad Ibrahim said he expects Malaysia to remain on track to achieve 4% to 4.5% growth in 2016 in anticipation of a stronger second half.

The drivers for second-half growth are higher production in the manufacturing sector, improved commodities production from the diminishing effect of El Nino, higher wages for civil servants and the upward revision of the minimum wage.

"Growth in 2016 will be supported by gradual improvement in private sector spending as the impact of GST (Goods and Services Tax) and price adjustments lapse," he said.

Hong Leong Investment Bank Research economist Sia Ket Ee opined that the GDP moderation trend should have bottomed out in Q1, and gradual recovery through government measures to support consumer spending will bring the full-year GDP to 4.2%.

"Also, we've seen intensified awards of infrastructure projects by the government, which will be positive for the construction sector. Though the external market is still subdued, at least we're assured that the impetus for the domestic market is still there," he added.

Looking at the numbers, private sector activity remained the key driver of growth in Q1 2016 despite private investment expanding by only 2.2% compared with 4.9% in Q4 last year, on the back of cautious business sentiments and adjustments in upstream oil and gas activity.

"However, investment activity remained supported by higher spending in the manufacturing and services sectors," Muhammad said.

Private consumption was resilient at 5.3% growth, thanks to a rise in household spending, supported by continued wage growth and favourable labour market conditions.

On the supply side, the services and construction sectors held up well by registering 5.1% and 7.9% growth respectively, partly offsetting the moderation in other sectors, such as manufacturing (+4.5%) and mining (+0.3%).

The agriculture sector, however, contracted 3.8% due to lower palm oil output arising from the El Nino effect.

Muhammad expects the inflation rate, which was higher at 3.4% in Q1, to trend lower from Q2 due to less GST impact and moderate domestic demand. On a full-year basis, inflation is projected to be within 2.5% to 3.5%.

On the currency front, Muhammad is of the view that the ringgit, which has depreciated to below 4.00 again against the greenback lately, will reflect its fundamentals over the long run. "The ringgit will show a lot of noise in between, but it will be stable in the long run."

Looking at the monetary policy committee meeting on Thursday, Sia expects the Overnight Policy Rate to remain unchanged at 3.25%.

"Domestic activity is still resilient, there is no need for BNM to ease the policy for the sake of supporting economic growth. Even though it has been slowing down, it is still a decent set of numbers. Besides that, BNM needs to balance the policy to uphold financial stability," he explained.

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