Malaysian economic growth slows in Q1 2018, BNM likely to keep interest rates on hold through 2018

The Malaysian economic growth moderated in the first quarter of this year. The GDP growth slowed to 5.4 percent year-on-year in the March quarter from 5.9 percent in the prior quarter. On a sequential basis, the economy grew 1.4 percent, acceleration from the revised 1 percent sequential growth in the fourth quarter of last year.

Private consumption, which grew 6.9 percent year-on-year, mainly drove the growth in the first quarter. But growth in government spending and investment alleviated sharply. Private investment rose just 0.1 percent year-on-year. Real exports rose 3.7 percent year-on-year, a slowdown from 6.7 percent in the prior quarter. However, as imports also dropped 2 percent year-on-year, the contribution from net trade to overall GDP growth rose to 4.1 percent, the highest since the fourth quarter of 2014.

Meanwhile, manufacturing growth slowed to 5.3 percent year-on-year from 5.4 percent. This deceleration was in line with the milder rise in exports. Agricultural output moderated to 2.8 percent year-on-year while the mining and construction sectors rose 0.1 percent year-on-year and 4.9 percent, respectively. Services saw a rise of 6.5 percent year-on-year.

The data implies that the Malaysian growth might have peaked. The incoming Pakatan Harapan (PH) administration has highlighted that it would be re-prioritizing some of the previously planned infrastructure projects whereas some capacity building projects might be delayed because of the general rise in economic uncertainty. To some degree, decelerating investment might be compensated by higher consumption arising from the removal of the Goods and Services Tax and proposed reinstatement of targeted fuel subsidies. As inventories also dropped sharply in the first quarter of 2018, some support might come from re-stocking. Nonetheless, the risks to 2018 GDP forecast of 5.7 percent are to the downside, noted ANZ in a research report.

“Against this backdrop of potentially slower growth and inflation, BNM can afford to slow the pace of normalisation of monetary policy. Accordingly, we are taking off our earlier call of a 25bps increase in the OPR. We expect the OPR to be maintained at 3.25 percent through 2018”, stated ANZ.

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