Malaysia: GDP growth slows to multi-year low yet narrowly beats market expectations in Q1
May 13, 2016
Malaysia’s economy demonstrated its resilience once again in the first quarter of 2016, beating growth expectations for the second quarter in a row. The economy slowed from a 4.5% expansion in Q4 2015 to a 4.2% increase in Q1 2016 over the same period last year. Markets had anticipated a slightly more severe deterioration and expected growth to fall to 4.1%. However, the result marked the weakest expansion since the 2008-2009 financial crisis. Although the Malaysian economy has benefited from robust domestic demand—despite unfavourable base effects from front loaded consumption ahead of last April’s Goods and Services Tax implementation—growth has moderated amid a deterioration of the external sector.
Domestic demand, which increased 5.9% (Q4: +4.6% year-on-year), drove Q1’s expansion. Private consumption showed strength despite the aforementioned adverse base effect and accelerated from a 4.9% increase in Q4 to a 5.3% increase in Q1. Low unemployment and modest inflation have boosted real incomes, while high levels of liquidity in the financial system and strong domestic credit growth have also incentivised Malaysians to consume more. Government consumption also accelerated in Q1, picking up from a 3.3% expansion in Q4 to a 3.8% increase. Partially offsetting the acceleration in private and government consumption was a sharp deceleration in fixed investment, which barely grew in Q1. Fixed investment growth plummeted from 2.5% in Q4 to 0.1% in Q1, the smallest increase in the series’ history. This is likely attributable in part to weak business sentiment amid financial instability that impacted global markets in Q1. Furthermore, a scaling back of capex in the mining industry likely showed up in Q1’s data. A sharp increase in inventory spending however boosted total investment which climbed from 4.9% to 7.9% in Q1.
The external sector did not demonstrate the same resilience as the domestic sector and deteriorated notably in Q1. Exports swung from a 4.0% expansion in Q4 to a 0.5% contraction in Q1. Behind this deterioration was a decrease in prices for liquefied natural gas, crude oil, and other petroleum products which impacted the total value of exports. Manufacturing exports continued to show strength however it was not enough to stop the current account surplus from narrowing. Growth in imports slowed to a 1.3% increase in Q1 (Q4: +4.0% yoy). The slowdown is likely due to a decrease in imports of capital goods, which is corroborated by the weak growth in fixed investment. The external sector’s contribution to growth swung from plus 0.4 percentage points in Q4 to minus 1.2 percentage points in Q1, which was the weakest reading in almost three years.
Overall, while the external sector dragged on the economy, the figures from the domestic side of the economy were encouraging. Domestic demand will likely remain strong as the underlying factors supporting it will not dissipate in the coming quarters. Furthermore, as analysts Euben Paracuelles and Brian Tan at Nomura state, private investment could observe a resurgence in the coming quarters:
“Ongoing projects under the Economic Transformation Program are also supporting fixed investment, which will likely surge in year-on-year terms in Q2 because of favourable base effects. The government has also decided to relax its restrictions on the hiring of foreign labour in the manufacturing, construction, plantation and furniture-making industries, which could help alleviate any labour shortages in these sectors.”
Author: Robert Hill, Economist