Malaysia’s GDP at 4.4% in 3Q18, growth expected to be on upside, says governor

Household spending rose 9% in 3Q18, supported by sustained wage growth and the 3-month tax holiday


Malaysia’s economy registered a 4.4% growth in the third quarter of 2018 (3Q18), underpinned by the private sector as private consumption expanded following the zero-rating of the Goods and Services Tax (GST) in June.

Based on data from Bank Negara Malaysia (BNM) and the Department of Statistics Malaysia, economic growth on a quarter-on-quarter seasonally adjusted basis came in at 1.6% versus 0.3% in the previous quarter.

The country’s economic growth has been slowing since 3Q17, when GDP registered at 6.2% year-on-year (YoY) versus 5.8% YoY in 2Q17. Malaysia’s GDP stood at 5.9% in 4Q17, 5.4% in 1Q18 and 4.5% in 2Q18.

BNM governor Datuk Nor Shamsiah Mohd Yunus (picture) said in the absence of supply shocks in commodities, national economic growth — which stood at 4.7% in the first three quarters of 2018 — could have been 0.5% to 0.7% higher.

“The first three quarters were affected by supply shocks. It (the consecutive decline) has bottomed. The growth trajectory would be on the upside moving forward. The agriculture, mining and quarrying sectors contracted 1.3% in 3Q18, but the remaining 82% of the economy grew by 6.2%,” she told a press briefing on the country’s 3Q18 GDP results in Kuala Lumpur last Friday.

Household spending rose 9% in 3Q18, supported by sustained wage growth and the three-month tax holiday, while private investment was 6.9% higher on increased spending in machinery and equipment to cater to positive demand.

The manufacturing and services sectors supported growth on the supply side, although the mining sector continued to be affected by production shocks.

The agriculture sector remained weak due to the protracted recovery from production constraints in the previous quarter.

Malaysia’s current account surplus dipped slightly to RM3.8 billion during the quarter from RM3.9 billion in 2Q18, largely attributed to the widening deficit in net primary income due to higher retained earnings by foreign investors.

Foreign direct investments (FDIs) increased to RM3.9 billion from RM2.8 billion in the previous quarter, mainly coming from the US, the UK and Japan.

The governor said growth in 2018 and 2019 will be driven by the private sector, amid adverse commodity supply shocks this year and continued reprioritisation of public sector spending in 2019.

“For the remainder of 2018 and going into 2019, a gradual recovery in commodity production will provide support to growth. We forecast GDP to expand 4.8% in 2018 and 4.9% in 2019,” Nor Shamsiah added.

The coming on-stream of new production facilities and recovery in commodity production will further support growth. Private consumption will be underpinned by employment and income growth, while private investment will be supported by both FDIs and domestic direct investment in diverse sectors.

“We recognise, however, that risks to growth remain tilted to the downside stemming mainly from any escalation of global trade tensions, greater financial market volatility and disruption in commodity production,” she said further.

Recent announcements of further trade tariffs by the US could lead to lower global GDP and trade activity, posing a major shock to global growth prospects.

“For Malaysia, the current trade actions are estimated to weigh down GDP by 0.3% to 0.5% in 2019. This has already been incorporated into our forecast.

“We also consider a downside scenario of further trade actions which could reduce global growth and lead to an additional reduction of 0.9% to 1.1% in Malaysia’s growth. However, potential trade diversion opportunities could partially mitigate the negative impact of trade tensions.”

Headline inflation declined to 0.5% in 3Q18 compared to 1.3% in 2Q18, mainly reflecting the impact of the zero-rated GST, while the implementation of the Sales and Services Tax from Sept 1 had a muted effect on inflation during the quarter under review.

Annual average headline inflation is expected to be low in 2018, mainly reflecting the impact of the zero-rated GST, as well as stable domestic fuel prices.

However, the central bank anticipates headline inflation to increase next year, primarily due to higher projected global oil prices and the prospective floating of domestic fuel prices.

“While the impact of the consumption tax policy will contribute to higher headline inflation in 2019, it will lapse towards the end of 2019,” BNM said.

Meanwhile, in line with regional currencies, the ringgit depreciated by 2.5% against the US dollar in 3Q18 mainly on non-resident portfolio outflows amid continued strengthening of the greenback, which in turn was supported by positive US economic data and outlook.

The local note and regional currencies were also affected by negative sentiment due to concerns over contagion risks from vulnerable emerging markets.

Non-resident portfolio investment registered a more moderate outflow of RM3.6 billion in 3Q18 versus a net outflow of RM37.2 billion in the immediate preceding quarter, amid significant global financial market volatility.

“Going forward, the ringgit will continue to be affected by the ongoing strength in the US dollar and external uncertainties. We do expect regional currencies, together with the ringgit, to continue to depreciate. But our deep financial markets and deep pool of strong institutional investors will ensure orderly adjustment in both foreign-exchange markets and in our currency,” Nor Shamsiah said.

The US Federal Reserve has indicated that it will continue hiking rates next year, with markets pricing in for two hikes in 2018 and one more in 2020.

“So, the regional currencies together with the ringgit will be affected by the stronger US dollar. In terms of the extent of the depreciation of the ringgit, which has depreciated by about 3.35% this year, it is in line with what other regional currencies are experiencing,” she added.