Malaysia’s household spending to remain the key driver of GDP growth

KUALA LUMPUR: Household spending will remain the key driver of GDP growth in Malaysia through to 2019, said ICAEW in its latest Economic Insight: South East Asia report.

However, it said, most other domestic demand components are forecast to cool.

“We look for public spending to moderate as the new government reviews major infrastructure projects and undertakes plans to prune government expenditure.

“That said, there exists a number of uncertainties surrounding the government’s fiscal decisions,” it said.

The report, which is commissioned by ICAEW and produced by Oxford Economics, noted that the country’s GDP had surprised on the downside in Q2 slowing to 4.5% year-on-year, down from 5.4% in the previous quarter.

Imports grew at a much faster pace than anticipated, underpinned by a pick-up in domestic demand.

Household spending surged to a multi-year high of 8% year-on-year reflecting a boost to consumer sentiment after the government abolished the GST and the re-introduced fuel subsidies.

The report said while the government is committed to improving the fiscal deficit, the reinstated Sales and Service tax will only apply to ‘selected services at 6%’ and will cover a smaller range of goods and services compared to GST.

“As such, we do not think it will be sufficient to fill the revenue gap caused by the removal of the GST,” it said.

If the government remains committed to lowering the fiscal deficit beyond this year, it said, further expenditure cuts and/or a new source of revenue generation will be needed.

“Our base case is that government will tolerate some fiscal slippage to support domestic demand amid moderating export growth.” it said.

It downgraded its 2018 GDP growth forecast to 4.9% with GDP expected to grow by 4.7% in 2019.