Malaysia’s second quarter GDP exceeds expectations
KUALA LUMPUR: Malaysia’s gross domestic product (GDP) growth for the second quarter of 2017 (2Q17) exceeded expectations, growing at its fastest pace in two years.
However, analysts expect this strong growth to slow down in the second half of the year (2H17) as external developments are expected to affect the country’s economy.
In a recent report, MIDF Amanah Investment Bank Bhd (MIDF Research) noted that Malaysia’s GDP growth expanded by 5.8 per cent year-on-year (y-o-y) in 2Q17, beats market expectations of 5.4 per cent y-o-y and it is the fastest pace since 1Q15.
It pointed out that the strong growth mainly supported by private consumption which grew by 3.8 per cent and followed by investment at 1.1 per cent while from supply side, services and manufacturing sectors contributed significantly by 3.4 and 1.4 per cent respectively.
“We view the upbeat momentum in GDP growth was reflected in the steady performances of industrial production, distributive trade and external trade in 1H17.
“We opine strengthening domestic demand and upbeat external demand are the major anchors driving up GDP performance in 2Q17,” it said.
However, it cautioned, despite of firming improvement in global market, geopolitical conflicts in developed and developing economies remain a challenge to global economic activity.
In particular, it pointed out that the US-North Korea conflicts, terrorist attacks in Europe and Middle East tensions are some of the possible risks towards global growth.
The sluggish commodity prices would also pose a downward pressure on commodity-related industries.
“Hence, risks on global economy and weakening commodity prices will affect Malaysia’s economy via external trade and investment,” it opined.
It added, “Fundamentally, global economic condition has improved compared from a year ago. Upbeat economic performance seen in the first half of the year is expected to continue albeit at the slower pace.”
As such, it maintained its stance that Bank Negara Malaysia (BNM) would continue with the current supportive monetary stance and it also expect no changes in BNM’s monetary stance for 2017.
“Based on the current indicators, we are optimistic that Malaysia’s economy to expand by 5.1 per cent this year given the upbeat performance of domestic and global economy.
“Besides, improving labour market, continued wage growth and moderating inflation will support and spur domestic economy,” MIDF Research added.
Meanwhile, RAM Ratings maintained its positive outlook on the Malaysian economy, with another upward revision in GDP growth to 5.4 per cent for 2017, which is slightly higher than the earlier expectation of 5.2 per cent.
RAM Ratings believed that the present upside that the economy is experiencing mostly stems from recovery momentum amid a pickup in external demand and, consequently, the positive spillovers that this has triggered in the domestic economy.
“Although there are downside risks to both components, the resilience of domestic demand is still seen as the key driver of sustainable growth.
“Private consumption will sustain a healthy growth of 6.7 per cent this year, driven by strengthening labour conditions and fundamental necessities-based consumption.
“On the other hand, the expansion of private investment is expected to come in at eight per cent and will remain supported by the ongoing roll-out of infrastructure projects. It will also receive an additional boost from increased capacity-building activities by firms, attributable to better business sentiment,” it said in a press statement.
On the flip side, RAM Ratings also warned that external developments would test Malaysia’s capabilities of staying resilient in a volatile environment.
It pointed out that economic resilience against external developments will be the real test for growth sustainability.
“For one, the positive spill-overs of increased trade from a pick-up in global economic performance are expected to moderate amid the tapering of re-stocking activities in major sectors and as the marginal boost from the commencement of the investment cycle dissipates.
“Moreover, additional risks from key uncertainties such as Brexit developments (which are expected to affect EU-wide investment decisions) and the slow roll-out of potential US tax reforms as well as investment initiatives across the Atlantic could also dampen investment-type exports,” it said.
Nonetheless, it pointed out that export growth would still come in very strongly at 6.8 per cent this year, driven by a robust first half.
It further highlighted that external developments could also affect the volatility of capital markets and exchange rates.
“With this in mind, we expect the US dollar/ringgit exchange rate to average around 4.25 to 4.50 this year, which is at the higher end of our initial expectation of 4.00 to 4.50,” it concluded.
We view the upbeat momentum in GDP growth was reflected in the steady performances of industrial production, distributive trade and external trade in 1H17. MIDF Research