Domestic consumption picks up the slack

  • Business
  • Saturday, 29 Aug 2009

THE good news continued to roll in over the week, with Malaysia being the latest economy from Asia to report an increasingly rosier outlook. While the numbers may not appear encouraging, particularly with a gross domestic product (GDP) contraction of 3.9% year-on-year (y-o-y) for the second quarter to June, they managed to beat market expectations.

What’s more, the latest figure from Bank Negara confirms that the country’s economy has started to pick up already.

Taking the quarter-on-quarter view, Malaysia’s economy grew 4.8% in the three months to June, reversing two consecutive quarters of contractions.

(The country’s GDP shrank 7.8% q-o-q in the first quarter of the year and 3.4% q-o-q in the preceding quarter.)

Based on Bank Negara’s report, domestic consumption had been the main growth driver for the country’s economy during the quarter in review.

Of the total domestic consumption, private spending seemed to have overtaken public spending as the key contributor to the improvement of Malaysia’s economy.

Private spending rose 0.5% y-o-y, and contributed 0.3 basis points to the country’s GDP, while public spending, which grew 1% y-o-y, contributed only 0.1 basis points.

With domestic consumption expected to continue playing its role in sustaining the country’s economy in the next two quarters of the year, the Government will avert measures that are likely to have a dampening impact on domestic demand, MIDF Research head Zulkifli Hamzah says in his recent report.

“Indeed, a key worry is whether domestic demand – a key growth engine of the Malaysian economy in the pre-crisis boom years – will resume its role. This will depend largely on improvements in consumer and business confidence and the effectiveness of the government’s various stimulus packages,” Standard Chartered Bank economist Alvin Liew says.

“The next two quarters will be the turning point, when the impact of the stimulus money gains further traction, and translate into higher domestic demand and even more growth for the construction sector,” an economist tells StarBizWeek.

Meanwhile, the consensus view is that the overnight policy rate will continue to be pegged at the historic low of 2% until the end of the year, as the threat of inflation in the country remains subdued. (Malaysia is currently undergoing a phase of disinflation as indicated by the 1.4% y-o-y and 2.4% y-o-y decline in consumer price index in June and July, respectively.)

Economists explain that the low interest rate environment is necessary to support private spending and encourage local investment activities, which had been weak for the past three quarters, as businesses turned cautious in their spending.

Affin Investment Bank economist Alvin Liew points out in his report that the decline in private investment had been offset partially by higher public sector investment expenditure during the second quarter. This was reflected in the 35% y-o-y increase in government gross development expenditure to RM12.1bil.

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