Malaysia’s 2018 economic growth expected to remain above 5%
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Malaysia’s first quarter (1Q18) gross domestic product (GDP) growth came in at 5.4% year on year, lower than the consensus projection but AmBank Research is maintaining its 5.5% GDP growth for this year as it expects private consumption and the services sectors to continue to support growth together with other areas of business activities.
“Apart from private consumption and services, we noticed that most of the other economic segments showed some loss of growth momentum. Still, our current 5.5% GDP growth for the full year remains, as we expect private consumption and services sectors will continue to support growth together with other areas of business activities,” it said in a report.
“With the announcement of the Goods & Services Tax removal, added with the potential reintroduction of fuel and electricity subsidies as well as the review of toll roads, these suggest that the underlying inflation will pick up gradually.
“While our base case for OPR (Overnight Policy Rate) remains with a total of one rate hike by Bank Negara Malaysia (BNM) that took place in January with the OPR now at 3.25%, the probability for a second rate hike in September 2018 remains at a low 45%,” said AmBank.
However, Kenanga Research has revised its 2018 GDP growth forecast to 5.1% in 2018 from 5.5% (2017: 5.9%), as it said the change in government will likely put a damper on private investment due to policy uncertainty and disrupted public spending, which pose downside risks to its GDP forecast going forward.
“It then can prioritise or strategically delay projects that have high import content as it did in the 1990s.”
“The only upside to growth could possibly be derives from higher private consumption following the government’s decision to scrap the Goods and Services Tax (setting its rate at zero from June 1) and take its time to implement the sales and services tax. External factors may also weigh on growth mainly the expectation that exports would continue to slow on the back of the slowing global demand for consumer electronics especially mobile devices.”
Nonetheless, it said there could be offsetting factors if the government takes an aggressive approach to review major infrastructure projects. It then can prioritise or strategically delay projects that have high import content as it did in the 1990s. Less import could help boost net exports and support GDP growth.
Kenanga expects monetary policy to remain accommodative. It said although the central bank has left interest rates unchanged since it raised the OPR in January, the outlook for monetary policy may have turned considerably uncertain following the change in government.
“The biggest risk to the monetary policy outlook is that a post-election sharp decline in investment would exacerbate an economic slowdown. This may prompt BNM to loosen its monetary policy and cut interest rates. For now we are maintaining our view that the OPR will remain on hold until the end of the year.”
Questions & Answers
Q.What is the primary reason Kenanga Research has lowered its GDP growth forecast for Malaysia?
What is the primary reason Kenanga Research has lowered its GDP growth forecast for Malaysia?
Kenanga Research revised its forecast due to concerns that the change in government will negatively impact private investment. Policy uncertainty and disrupted public spending are expected to pose downside risks to growth.
Q.What factors does AmBank Research believe will continue to support Malaysia's economic growth?
What factors does AmBank Research believe will continue to support Malaysia's economic growth?
AmBank Research expects private consumption and the services sectors to continue supporting economic growth. They also anticipate other areas of business activities will contribute to maintaining the projected GDP growth.
Q.What could be an upside for Malaysia's growth according to Kenanga Research?
What could be an upside for Malaysia's growth according to Kenanga Research?
Higher private consumption could provide an upside, following the government's decision to scrap the Goods and Services Tax. The delay in implementing the sales and services tax may also contribute to this.
Q.Why does AmBank Research anticipate inflation will gradually pick up?
Why does AmBank Research anticipate inflation will gradually pick up?
AmBank Research expects underlying inflation to gradually increase due to the Goods & Services Tax removal. Potential reintroduction of fuel and electricity subsidies, along with a review of toll roads, also contribute to this expectation.