Contrary to market prediction, Malaysia’s economy grew at a marginally slower pace in the third quarter, instead of picking up pace.
Gross domestic product (GDP) growth for the three months to September 2018 came in at an annualised 4.4%, slightly down from 4.5% in the preceding quarter.
This compared with a Reuters poll of 15 economists, whose median forecast was for a 4.6% growth for the third quarter of 2018.
The growth moderation represented the fourth consecutive quarter of GDP slowdown – and the slowest pace in two years – for Malaysia. It is, however, not an entirely surprising result, considering the fact that many major and regional economies had also recorded slower GDP growth in the third quarter of 2018 in tandem with the moderating momentum in global growth and trade activities.
According to Bank Negara, despite robust consumer spending and private investment, GDP growth in July-September was mainly weighed down by the lingering effects of “supply shocks” in the mining and agriculture sectors.
Bank Negara governor Datuk Nor Shamsiah Yunus said had it not been for the steep contraction in liquefied natural gas (LNG) and crude palm oil (CPO) production in the second and third quarters of the year, GDP growth for both the quarters would have been higher by 50 to 70 basis points.
“Growth was affected by lingering commodity-specific supply shocks,” Nor Shamsiah said.
“Nevertheless, the adverse impact on overall growth was mitigated by expansion in other economic sectors, mainly the services, manufacturing and construction sectors, which account for 82% of the country’s economy,” she told reporters during a briefing on Malaysia’s economic performance for the third quarter of 2018 yesterday in Kuala Lumpur.
She notes that the country’s GDP growth for the third quarter of 2018 would have been 5.1%, while the second quarter growth would have been 5%, had it not been for the supply shocks in the mining and agriculture sectors.
Data shows during the first three quarters of the year, 17% of the country’s economy, represented by the agriculture, mining and quarrying sectors, contracted 1.3%.
Of significance, though, the remaining 82% of the country’s economy grew 6.2% during that period.
The “supply shocks” aside, Malaysia’s third-quarter GDP growth performance was characterised by a 9.0% growth in household spending, thanks to the zerorisation of the goods and services tax (GST); strong employment and wage growth; as well as positive consumer sentiment.
In addition, growth was also supported by higher private investment, which expanded 6.9%.
On the flipside, gross exports fell 0.8% on account of slower expansion in non-electrical and electrical manufactured exports amid a smaller contraction in commodity exports.
According to Nomura Research, while private and government consumption spending growth accelerated in the third quarter, supporting the economy, this was a temporary factor.
“Private consumption may have been slightly boosted by the zero-rating of the GST in June, which was not replaced by the SST until September. Investment spending growth improved, but the lack of fiscal space, the halting of big-ticket infrastructure projects under the new government and an export slowdown should all dampen spending growth,” the international banker explains in its note.
Nomura projects Malaysia’s GDP growth to be 4.7% in 2018 and 4.2% in 2019, after taking into account the risk of a deepening tech downcycle and falling external demand.
This, in turn, should negatively impact domestic demand, particularly private consumption, as wage growth tends to move in tandem with export growth, it says.
According to Nor Shamsiah, overall, the slowdown in Malaysia’s GDP is expected to have bottomed out in the third quarter, and the trend for subsequent quarters would be on an “upward trajectory”.
“With the 4.4% growth registered in the third quarter, the Malaysian economy expanded by 4.7% in the first three quarters of the year. In view of this development, Malaysia is on track to register a growth of 4.8% for 2018,” she says.
As for 2019, Nor Shamsiah says the country’s economic prospects are expected to remain firm, with overall GDP growing at 4.9%, underpinned by continuous private sector activities.
“Private sector activities will remain the key driver of growth, as rationalisation in public sector spending continues,” she says.
She notes, for instance, the commencement of new production facilities such as the Refinery and Petrochemical Integrated Development, or RAPID, project and the recovery in commodity production would further support growth.
“Private consumption will be supported by employment and income growth, while private investment will be supported by both foreign direct investment (FDI) and domestic direct investment in diverse sectors,” she adds.
Risks and reform
Despite the optimistic outlook, Bank Negara recognised that risks to growth remain tilted to the downside, stemming mainly from further escalation of global trade tensions, greater financial market volatility and the unanticipated disruption in commodity production.
On trade tensions, for instance, in its current form, the central bank expected Malaysia’s GDP in 2019 to be weighed down by 0.3-0.5 basis points based on its study. However, the overall impact on growth could be as large as a reduction of 1.3-1.5 basis points next year if trade tensions intensify further.
Nevertheless, Nor Shamsiah stresses, the firm growth of the Malaysian economy would remain supported by its sound macroeconomic fundamentals.
What did she mean by that?
“First, the economy is well-diversified in terms of sources of growth, as well as export products and markets (which means Malaysia is not reliant on one source, product or market for growth),” Nor Shamsiah explains.
“Second, labour market conditions remain favourable, underpinned by continued wage and employment growth (which implies continued private consumption growth),” she says.
Nor Shamsiah also pointed out that Malaysia remains an attractive destination for FDI, while the current account continues to register a surplus, which will likely put the country in a less vulnerable position to capital outflow.
In addition, she notes, Malaysia’s deep financial markets, resilient banking system and strong financial buffers would ensure orderly and efficient financial intermediation in the face of financial market headwinds.
“Given these sound fundamentals, Malaysia is well-positioned to adjust to the deeper structural reforms being undertaken by the Government,” Nor Shamsiah says.
“The reforms will position the economy on a firmer footing and to perform better going forward,” she explains.
Oil prices and inflation
Meanwhile, on how declining oil prices could affect Malaysia’s economy, Nor Shamsiah says the impact would likely be negligible on the country’s overall growth due to its diversified economy and export structures, as well as the deep financial market that enables the country to absorb intermediate capital flows.
“The non-commodity sector accounted for more than 18%, while the mining sector only 8.4%, hence the impact on the growth is manageable. The lower oil prices, however, will lend positive support to higher consumption via lower fuel prices and higher disposable income,” she explains.
She points out that in 2015, for instance, when oil prices dropped to US$40 per barrel and the ringgit depreciated by nearly 30% to RM4.40 to a US dollar, while there was a significant capital outflow from the country, the country’s GDP continued to register strong growth of about 5% that year.
Malaysia saw its inflation, as measured by the change in Consumer Price Index (CPI), eased to 0.5% in the third quarter from 1.3% in the second quarter.
The decline in headline inflation, Bank Negara said, was due mainly to the impact of GST zerorisation, noting that the implementation of the sales and services tax (SST) on Sept 1 had a muted effect on the CPI.
While the annual headline inflation is expected to be low this year, CPI is projected to increase in 2019 primarily on higher projected global oil prices and the floating of domestic fuel prices.
“While the impact of the consumption tax policy will contribute to higher inflation in 2019, it will lapse towards the end of the year,” Nor Shamsiah says.
“But demand condition is expected to remain sustainable and that is why the underlying inflation, excluding the impact of the consumption tax, is expected to remain stable next year,” she adds.
When asked how would Bank Negara respond to the widening interest rate differential between the United States and Malaysia, Nor Shamsiah said the central bank would continue to look at the balance of growth and inflation in determining the country’s interest rate.
Since the hike of 25 basis points in January this year, the overnight policy rate has been maintained at 3.25%.
On ringgit, Shamsiah says, the local currency is expected to continue to be affected by external uncertainties as well as the strengthening US dollar, as the US Federal Reserve is expected to continue raising interest rates.
During the third quarter, the ringgit fell 2.5% against the US dollar as a result of the continued strengthening of the greenback and moderate outflows of non-resident portfolio investment.
“The strengthening of the US dollar was supported by positive US economic data and outlook during the quarter. The ringgit and the regional currencies were also affected by negative sentiments due to contagion risk from vulnerable emerging market economies,” Nor Shamsiah says.
For the nine months to September, Malaysia’s current account registered a cumulative surplus of RM22.7bil, or 2.2% gross national income (GNI).
“The current account is expected to be in surplus, supported by a sizeable goods surplus which would offset the deficit in the services and income account,” Nor Shamsiah says, adding that the current account surplus is expected to range from 2%-3% of GNI for 2018.
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