Better-than-expected economic growth

  • Business
  • Saturday, 12 Nov 2016

DESPITE the doom and gloom in recent months, the Malaysian economy managed to expand with a gross domestic product (GDP) growth of 4.3% for the third quarter ended Sept 30 compared with the same quarter a year ago, better than the market’s median expectations of 4% while on a quarter-on-quarter basis, GDP grew by 1.5%.

Data released by Bank Negara showed that the mainstay of the economy is still domestic demand and in particular private consumption, which has steadily improved since last year following the implementation of the goods and services tax. However, consumer sentiment remains weak with the Malaysian Institute of Economic Research’s (Mier) consumer sentiment index falling again in the third quarter and well below the 100-point threshold. This indicates that consumers are still cautious on their spending.

Private sector investment remains more volatile, reflecting the concerns of businesses. Mier’s business conditions index for the third quarter showed that the private sector continues to be wary of the challenging economic conditions as the index fell below the 100-point threshold after having gone above it in the previous quarter. Mier attributes the drop in business sentiment to the slower sales and production, decline in local and export orders as well as increasing stock levels.

Bank Negara governor Datuk Muhammad Ibrahim, while acknowledging that overall global economic conditions will likely continue to be challenging, says that growth prospects remain subdued despite measures by central banks in various parts of the world to support growth.

“Overall, while domestic conditions remain resilient, uncertainties in the external environment may pose downside risks to Malaysia’s growth prospects,” he says at a briefing on the country’s third-quarter economic and financial developments. Muhammad also noted that net exports played a role in supporting growth in the quarter under review.

He says the economy is on target to grow by 4% to 4.5% this year. “Domestic demand, particularly private sector activity, will continue to be the key driver of growth,” Muhammad says, adding that private consumption is expected to remain supported by wage and employment growth.

The raft of measures announced by the Government to increase disposable income, including the rise in civil service salaries from July 1 and the rise in 1Malaysia People’s Aid announced in Budget 2017 for the Bottom-40 income brackets, will help to boost private consumption.

“Investment activity will continue to be anchored by the ongoing implementation of infrastructure projects and capital spending in the manufacturing and services sectors,” Muhammad says. Exports will remain weak due to subdued demand from Malaysia’s key trading partners. Year-to-September, exports grew marginally while imports have outpaced exports on a weaker ringgit.

To questions on how US President-elect Donald Trump’s economic and trade policies will impact Malaysia, Muhammad says: “To make an assessment now is a bit too early but as an economy, we must always be resilient to absorb any external shocks. As an economy, we’ve always been supportive of trade deals and we’ve been very open to the process of globalisation.”

Trump is not in favour of the Tran-Pacific Partnership, a trade pact involving Malaysia, the United States and 10 other Pacific Rim countries. He has also threatened to impose 45% tariffs on Chinese imports into the United States, which may provoke a trade war.

“We’ve prepared our industries and people for all the challenges brought on by the increase in globalisation, so as the policy from the US becomes more apparent and more certain, then we’ll need to do the necessary changes,” Muhammad says, pointing out that it will be an interesting issue to discuss in the next economic briefing when things are clearer.

On monetary policy, he says the central bank will be watching how developments pan out in the United States before making any changes to policy. Bank Negara’s monetary policy committee meets on Nov 23 while the US Federal Open Market Committee meets on Dec 13 and Dec 14. Traders have priced in an 80% likelihood that the US Federal Reserve will vote to raise the benchmark federal funds rate by 25 basis points after raising it a year ago by 25 basis points.

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