Malaysia: Growth decelerates in the second quarter despite strong domestic demand
Momentum in the Malaysian economy ebbed sharply in the second quarter, with growth of 4.5% year-on-year. The result was below the first quarter’s 5.4% increase and undershot market expectations of a softer moderation to 5.2% growth. Moreover, in quarter-on-quarter seasonally-adjusted terms the deceleration was even more marked with growth coming in at a multi-year low of 0.3%, down from the 1.4% increase observed in Q1.
A detailed breakdown showed that growth was spearheaded by domestic demand. Private consumption grew 8.0% year-on-year in the second quarter (Q1: +6.9% yoy), driven by increased expenditure on food and non-alcoholic beverages, communication, and restaurants and hotels. Moreover, the technical withdrawal of the goods and services tax (GST) on 1 June and the reinstatement of fuel subsidies in March provided a further boost. Furthermore, fixed investment growth rapidly accelerated to 2.2% in Q2 from a weak 0.1% expansion in the previous quarter. The acceleration was chiefly driven by the private sector and a rebound in machinery and equipment investment. Government consumption similarly picked up significant steam too, likely due to pre-election expenditure ahead of the 9 May elections (Q2: +3.1% yoy; Q1: +0.4% yoy).
In contrast, the external sector dragged sharply on growth, as exports lost momentum while import growth rebounded. The pace of growth of exports moderated from 3.7% in the first quarter to 2.0% in the second quarter, which was the weakest performance since Q3 2016. Meanwhile, imports rebounded from a 2.0% contraction in Q1 to a 2.1% increase in Q2. As a result, the current account surplus narrowed significantly from USD 3.8 billion in Q1 to USD 1.0 billion in Q2, the lowest reading in two years.
The economy should grow at a moderate pace in the remainder of the year. However, growth will be dampened by government expenditure cuts in the months ahead to offset the impact of the zero-rating of the GST. In addition, the reinstatement of the sales and services tax (SST) on 1 September will likely cause the recent jump in private consumption to be short-lived, while global trade concerns could weigh on the external sector.