Growth projection maintained on stronger demand

Nor Shamsiah: Economy will gain from the easing of restrictions. — Bernama

WITH the economy expected to improve further this year, no changes were made by the central bank to the country’s annual gross domestic product (GDP) growth projection of between 5.3% and 6.3% that was announced in March.

Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus says the projection was underpinned by stronger domestic demand, continued expansion in external demand, and further improvement in the labour market.

ALSO READ: Economy getting back in top form

“Growth would also benefit from the easing of restrictions, the reopening of international borders and implementation of investment projects,” she says.

Nevertheless, the governor does not rule out risks to the country’s growth momentum.

“These include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, adverse developments surrounding Covid-19 and heightened financial market volatility,” she adds.

Headline inflation was projected to average between 2.2% and 3.2% this year, unchanged from the bank’s earlier estimate, while underlying inflation, measured by core inflation, is also expected to trend higher to average between 2% and 3%.

ALSO READ: Malaysia's economy expands 5% in 1Q

Deputy governor Marzunisham Omar says there are price pressures, especially on food.

However, he says inflation in Malaysia remains moderate compared with other countries.

“Several key factors are expected to partly contain upward pressure on prices, namely, the existing price control measures and the continued spare capacity in the economy,” Bank Negara says in a statement.

Due to the rising cost of government subsidies, Marzunisham says more long-term solutions are needed to rein in inflation.

ALSO READ: Pegging the ringgit not in Malaysia's best interest

Marzunisham says the government is looking to broaden the country’s tax base to increase revenue, including the reintroduction of the goods and services tax (GST).

“Bank Negara is supportive of the GST and of course, we have to think about the timing of the reintroduction which will be taken into account by the government,” he says.

The Malaysian economy enjoyed a spurt in growth as it registered a 5% year-on-year (y-o-y) improvement in its GDP in the first quarter of 2022 (1Q22). In comparison, the country’s GDP shrunk 0.5% y-o-y in 1Q21.

On a quarter-on-quarter basis, the country’s GDP saw a growth of 3.9% from 4Q21.

According to Bank Negara, growth at the start of this year is mainly supported by the improvement of domestic demand, as economic activity continued to normalise with the easing of containment measures.

The recovery of the labour market also plays a role in the stronger GDP growth, with the unemployment rate declining to 4.1% in 1Q22 compared with 4.3% in the previous quarter.

Other factors such as continued policy support and strong external demand, amid the continued upcycle in global technology, provided further lift to growth.

“On the supply side, the services and manufacturing sectors continued to drive economic growth, expanding by 6.5% and 6.6% respectively,” the central bank says in the statement.

For the services sector, the expansion was due to higher leisure-related spending and business-related activities amid the reopening of the economy.

Meanwhile, for the manufacturing sector, demand for semiconductors and consumer-related products such as motor vehicles was a key factor in its growth.

However, the agricultural sector’s GDP saw a flat growth of 0.2% y-o-y due to disrupted palm oil output caused by the heavy rainfall at the start of the year.

Headline inflation moderated to 2.2% during 1Q22 compared with 3.2% in the previous quarter.

According to the central bank, headline inflation dipped due to the smaller contribution from the dissipating base effect from lower domestic retail fuel prices last year, and the absence of the base effect from electricity tariff rebates implemented in 2020.

Meanwhile, core inflation increased to 1.7% in 1Q22 from 0.8% in the previous quarter.

“This reflects price adjustments amid the higher costs and improving demand conditions, with price increases being more noticeable specifically for food items due to supply-related factors such as higher global commodity prices,” Bank Negara says.

Speaking of exchange rates, the ringgit depreciated by 0.7% against the United States dollar in 1Q22, while year-to-date, the ringgit has declined 4.7%.

According to the central bank, this is broadly in line with the movement of regional currencies.

The weakening of the ringgit was due to the strengthening of the US dollar, driven by higher US interest rates, global risk-off sentiment given the conflict in Ukraine and expectations of modest growth in China.

However, high commodity prices and Malaysia’s recovery prospects had cushioned the downward pressure on the ringgit from these external factors.

“Going forward, while domestic financial markets are subject to periods of high volatility, spillovers to domestic financial intermediation are expected to be contained,” it says.

“Malaysia’s strong external position and resilient banking system enable the economy to withstand external shocks,” it adds.

According to the governor, a flexible exchange rate is the most appropriate policy choice for the country.

“The flexible exchange rate buffers the economy from adverse effects rising from economic shocks and it also preserves Malaysia’s competitiveness under challenging global conditions,” she says.

The governor also notes that the pegging of the ringgit will not be in the interest of Malaysia, as it will have substantial risk and trade-offs. “For example, we will need to mirror the monetary policy of the country we are pegged against,” she says.

This will substantially cause the country to lose its monetary policy independence.

Speaking of the overnight policy rate (OPR), the recent increase of 25 basis points to 2% would affect both the depositors and borrowers, according to the governor.

“The higher OPR may affect borrowers for higher loan repayments. However, they could also benefit savers via higher deposit returns,” she says.

“Higher deposit returns could also encourage savings for individuals to rebuild their financial buffers after having been affected by the Covid-19 crisis,” she adds. The governor also notes that the OPR needs to be recalibrated with the conditions of the economy.

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 46
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights


Next In Business News

Strong economic fundamentals, prudent management to contribute to stronger ringgit
Matrix Concepts announces preview of latest Melbourne project
Poor skinny kid from Malaysia makes it really big
Brent could push past US$150/bbl if Russian oil exports shrink, BofA says
Indonesia to allocate about 1 million tonnes of palm oil for export
UK equities record best week since mid-March
Oil settles up ahead of US driving season
World stock markets rally, treasury yields fall on inflation data
Wall St Week Ahead-Stock rally fanned by hopes of Fed 'past peak hawkishness'
Embracing sustainability

Others Also Read