Malaysia's consumption boost will likely reverse in Q2

The boost in Malaysia's pre-GST household consumption in Q1 is expected to reverse in Q2. Household consumption rose 8.8% y/y in Q1, contributing 4.6ppt to GDP growth of 5.6% y/y during the quarter. 

"Q2 consumption growth of around 3-4% y/y, with a c.2-3ppt contribution to GDP growth is expected. An improvement in H2. H1 GDP growth will likely remain within the full-year forecast range of 4.5-5.5%", forecasts Standard Chartered.

Stnadard Chartered's forecast of 5% GDP growth this year compares with the average of 4.9% for the past 10 years. In this report, the bank examines the effect of GST implementation in Japan and Singapore to discern the possible impact on Malaysia. Domestic household consumption is expected to decelerate on a combination of slower economic activity, a less favourable wealth effect and a high base effect. 

The impact of GST implementation on growth should be moderate and will likely be smoothed out over the year, particularly given the concomitant removal of the sales and services tax, says Standard Chartered. In fact, CPI inflation rose only 0.9% m/m in April, suggesting a limited impact on the inflation basket.

Malaysia's Ministry of Finance has acknowledged that household consumption may slow because of taxes. However, it also noted a potentially positive impact on the economy, such as more competitive exports (as exports are tax-exempt) and the implementation of schemes to ease cash-flow problems and reduce business costs. Certain basic necessities are also exempt from GST. As the GST replaces the sales and services tax, the net impact will likely be less than the gross impact.