Malaysian economy expands in Q4 on private sector demand, likely to slow to 4.7% in 2016

The Malaysian economy expanded 4.5% in Q4, on par with Barclays' forecast of 4.4% and slightly higher than consensus expectations of 4.1%. The growth was mainly driven by the private sector demand amidst stable wage growth and strong labor market conditions. Private investment slowed moderately by continued to be the main driver for investment. Malaysia's Q4 growth on a seasonally adjusted basis expanded 6.3% q/q, as compared with 2.6% in Q3 2015. Today's Q4 GDP report suggests that the economy expanded 5% for the entire 2015, as compared with 6% growth recorded in 2014.

"In line with the regional trend, we expect Malaysia's growth to slow to 4.7% in 2016, with risks tilted to the downside", says Barclays.

The Bank Negara Malaysia (BNM) is expected to keep rates unchanged through 2016 even if growth decelerates at the margin and underlying inflation remains in check. BNM is likely to keep an open mind in injection additional liquidity through additional SRR cuts if deposit growth eases.

The central bank has signalled that the economy's growth trajectory faces risk majorly from external uncertainties amidst heightened financial market volatility and the current reforms domestically. However, it expects domestic demand to remain as the major growth driver. That said, the domestic demand is likely to slow further. However, the slowdown might be partly countered by a gradual rebound in Malaysia's net exports. Furthermore, private consumption is expected to moderate as wage growth slows and the fiscal position continues to be a drag on the economy.

In Q4, the nation's current account rebounded. In spite of the current negative terms-of-trade shock, the nation posted a current account surplus of MYR11.4bn in Q4 15 and MYR34.0bn for the entire 2015. Import weakness in 2016 is likely to be driven by a fall in capital imports that grew at a fast pace in the past five years.

But they are already beginning to show signs of reversal. Capital outflows are expected to ease in coming months as domestic institutions, government-linked corporate and insurance firms push back their FDI and portfolio outflows. The country's current account surplus is likely to rebound to 3.9% of GDP in 2016.