Malaysia: Strong GDP growth in 2015 surprises analysts in Q4
February 18, 2016
In the fourth quarter of 2015, GDP expanded 4.5% over the same period of the previous year, which marked the slowest rate since Q1 2013. While this was a deceleration, it the figure was above market expectations of a 4.3% increase and brought full year GDP growth to 5.0%. The stronger-than-expected performance occurred in spite of a series of factors that threatened to significantly compromise the economy, including currency depreciation, political instability concerns, unfavourable base effects regarding both investment and consumption, as well as a collapse of revenues related to the oil and gas sector. The upside surprise was driven in part by strong consumption growth.
Of particular salience was that private consumption was more robust than expected with an expansion of 4.9% over the previous quarter (Q3: +4.1% year-on-year). This expansion came in spite of unfavourable base effects stemming from front-loaded consumption prior to the implementation of the Goods and Services Tax (GST) in April 2015. This helped drive up total consumption growth half a percentage point from 4.0% in Q3 to 4.5% in Q4. Government consumption slowed from a 3.5% expansion in Q3 to a 3.3% increase in Q4. Aberrance to strict fiscal consolidation targets, as well as the cessation of a number of government sponsored investment project which were completed during the last half of the year were behind the moderation in government spending. Fixed investment deteriorated substantially in Q4, falling form 4.3% to 2.8%, which helped to slow total investment to 4.8% in Q4 (Q3: +7.4% yoy). Although this is a striking decrease, the number does not tell the whole story. Investment growth in Q4, was again dragged down by base effects as prior private and public capex was supported by the Economic Transformation Program. Furthermore, although public investment and private investment in the oil and natural gas sector fell substantially, private investment in manufacturing and services remained robust in the fourth quarter. This is good news, since Malaysia will be counting on this sector to support growth in the coming year as less reliance is placed on the oil and natural gas sector.
The external sector did not disappoint either, although its significance to overall growth remained muted. Exports grew 3.7%, up from 3.2% in Q3. Although it moderated somewhat in December, the current account balance in Q4 was substantially higher compared to the rest of the year. Exports of palm oil, natural gas and petroleum products all saw decreases, or only subdued expansions. However, the remainder of Malaysia’s export profile performed well and helped to propel exports to a 3.7% expansion (Q3 +3.2% yoy), indicating that the rest of the economy is picking up the slack from the natural resource sector. Imports also expanded at a slightly-higher rate, growing 3.6% in Q4 (Q3: +3.2% yoy), corroborating the robust domestic demand. Both imports and exports grew at the fastest rates in six quarters. The external sector’s contribution to growth was steady at Q3’s 0.3 percentage points.
Overall the figures were encouraging and indicate that Malaysia’s reliance heading into 2016, despite the series of risks that threatened to seriously derail growth in 2015. Regarding the strong domestic demand that drove the economy in Q4, analyst Euben Paracuelles at Nomura stated that:
“The data continue to suggest little reason to fear a plunge in domestic demand. We have long argued that private consumption in Malaysia will prove resilient despite the implementation of GST (…), supported by a still-healthy labour market, and avoid the experience in Japan, which contracted when its consumption tax rate was hiked. Meanwhile, private sector investment should continue to hold up despite lower oil prices, especially in the manufacturing and services sectors which are still doing well, while there is likely limited room to cut oil and gas capex further as most non-essential capex was likely cut or postponed in 2015.”
This is also good news for the government, as the 2016 budget had banked on consumption increasing and bolstering government revenues in order to achieve its proposed fiscal balance of 3.1% via revenues from the GST.
Author: Robert Hill, Economist