Domestic demand continues to fuel Malaysia’s growth, ICAEW says

Given moderating export growth and tighter credit conditions, the GDP is expected to reach 5.1% in 2018, a slight ease from 6% estimated in 2017


Domestic demand, supported by solid labour market conditions and investments mainly in infrastructure, will remain Malaysia’s primary growth driver.

The Institute of Chartered Accountants in England and Wales (ICAEW) in its “Economic Insight: South-East Asia” report said while growth for 2018 is expected to be moderate, domestic demand still plays a vital part in it.

“Given moderating export growth and tighter credit conditions, the gross domestic product (GDP) is expected to reach 5.1% in 2018, a slight ease from 6% estimated in 2017,” the institute said.

ICAEW believes that domestic demand is expected to remain resilient, particularly on investment, as well as in infrastructure spending. Household spending, however, should remain solid.

“Key projects funded through direct domestic and foreign investment flows include the currently under-construction East Coast Rail Link and the Kuala Lumpur-Singapore high-speed rail line, where work is slated to begin in 2018.

“The Malaysian government has also earmarked RM6.5 billion under Budget 2018 to develop rural infrastructure within the country and all of this would lead to domestic demand taking centre stage in fuelling the nation’s growth,” the report stated.

ICAEW economic advisor/ Oxford economics lead Asia economist Sian Fenner (picture), however, said notwithstanding the positive economic growth outlook for the remainder of this year and next, inflation is expected to moderate in 2018.

“We believe core inflation will edge higher next year, although overall inflationary pressures are expected to be contained.

“We expect headline inflation to moderate from an estimated 3.8% to 2.9% next year,” Fenner told reporters after presenting the ICAEW “Economic Insight: South-East Asia” for the fourth quarter of 2017 (4Q17) in Kuala Lumpur yesterday.

She added that household debt servicing costs are likely to increase in line with the rise in domestic borrowing rates, as well as in view of an estimated 25-basis-point hike in the Overnight Policy Rate (OPR) likely to be announced in the 1Q18 by Bank Negara Malaysia (BNM).

Although Budget 2018 will provide an ongoing support for consumer expenditure, spending is expected to moderate from the exceptional growth in 2017, Fenner said.

She also said that among the things to monitor next year are the country’s general election, fiscal slippage risks and also the level of household debt.

ICAEW expects the process of monetary policy normalisation by BNM to proceed in a gradual and well-communicated manner.

“A very gradual macro policy normalisation cycle, along with still relatively solid trends in global trade growth, are expected to ensure growth remains reasonably resilient in Malaysia as well as across the region,” the report said.

According to ICAEW, the ringgit has been the strongest currency in the South-East Asian region and amid the fact that the soft US dollar has been quite attractive to foreign investors.

The firm predicts the ringgit will be traded below RM4.20 against the US dollar next year.