The Malaysian economy grew 4.2% year on year (y/y) during the first quarter, moderating from 4.5% in the previous quarter, and dragged down by a slowdown in investment and exports.
IHS perspective | |
Significance | Malaysian real GDP growth moderated to a six-year low of 4.2% y/y in the first quarter, dragged down by weak investment and exports. Yet, despite the slower pace of expansion, Malaysia's economy remains resilient given the global headwinds, with the manufacturing, construction, and services sector showing steady expansion. |
Implications | The Malaysian economy may not have hit the bottom yet and the GDP growth is likely to slow further in the second quarter, but steady domestic consumption expenditure and the upcoming pipeline of infrastructure development projects should offset the weakness in foreign trade and restrain the economy growth from a steeper deceleration. |
Outlook | With continued weak global fuel prices and sluggish exports demand from the Southeast Asia region, IHS has slightly lowered growth forecast for 2016 to 4.2% from 4.3%. The economy should see a modest turnaround from the second half of 2016 onwards and growth is expected to strengthen to 4.4% in 2017 and 5.1% in 2018. |
High frequency indicators, such as industrial production and external trade, have been suggesting the Malaysian economy continues to suffer from weak global commodity prices, China's growth slowdown, and the El Nino weather pattern. Hence, a slower growth in the first quarter had been fully anticipated. While the first-quarter real GDP growth dropped to its 6-year low of 4.2% y/y, on a seasonally adjusted, quarter-on-quarter (q/q) basis, the GDP edged up by 1.0%.
Malaysian real GDP and components (Y/Y, % change) | ||||||
| Q1 2016 | Q4 2015 | Q3 2015 | 2013 | 2014 | 2015 |
Real GDP | 4.2 | 4.7 | 4.9 | 4.7 | 6.0 | 5.0 |
-Domestic demand | 5.8 | 4.8 | 6.6 | 6.4 | 5.3 | 5.9 |
-Private consumption | 5.3 | 4.1 | 6.4 | 7.2 | 7.0 | 6.0 |
-Govt. consumption | 3.8 | 3.6 | 6.9 | 5.8 | 4.8 | 4.5 |
-Gross domestic investment | 7.9 | 7.2 | 6.9 | 5.0 | 2.8 | 6.4 |
-Fixed investment | 0.1 | 2.7 | 0.4 | 8.3 | 4.8 | 3.8 |
-Exports | -0.5 | 4.0 | -4.0 | 0.3 | 5.2 | 0.6 |
-Imports | 1.3 | 3.1 | -3.1 | 1.7 | 4.1 | 1.2 |
Gross value added by sector |
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-Agriculture | -4.1 | 1.5 | 2.2 | 2.2 | 1.0 | -8.1 |
-Mining and Quarrying | 0.4 | -1.5 | 5.4 | 3.4 | 4.8 | 1.0 |
-Manufacturing | 4.6 | 4.9 | 5.0 | 6.2 | 4.9 | 2.4 |
-Construction | 7.8 | 7.5 | 10.0 | 11.8 | 8.1 | 10.6 |
-Services | 5.1 | 4.9 | 4.3 | 6.5 | 5.1 | 3.9 |
Source: Department of Statistics, Bank Negara | ||||||
Resilient consumer spending
Private consumption grew by 5.3% y/y in the first quarter of 2016, from 4.9% y/y in the previous quarter. The increase outperformed the 4.7% y/y growth IHS anticipated, supported by stronger growth in wages and employment. This is particularly satisfying, given that consumer spending has been hampered by the new goods and services tax (GST) introduced in April 2015, which contributed to high base effects, particularly in this quarter, as households brought forward purchases during the same period last year. The consumer sentiment index reported by the Malaysian Institute of Economic Research rebounded to 72.9 in the first quarter from an all-time low of 63.8 in the last quarter of 2015. Although this reading is still below its long-time historical numbers, which averaged at around 100, the significant rebound in this quarter signals an improved shopping atmosphere as the impact of GST lapses. Meanwhile, the consumer price index (CPI) recorded a higher average headline number during the first quarter, up to 3.9% y/y from 0.7% y/y in the same period last year. This is largely due to the low base effects of the GST, which will fade away from the second quarter onward.
Investment stalls
Real gross fixed capital formation remained near standstill in the first quarter, expanding a mere 0.1% y/y, further down from 2.7% in the fourth quarter of 2015. Private investment advanced by 2.2% y/y, down from 4.9% y/y in the previous quarter. However, the slowdown is not surprising as investors are discouraged by lower earnings from commodities and slowing external demand. In addition, the deceleration partly contributed to the high base effects created by the unexpected pick-up in fixed investment in the first quarter of 2015. On the other hand, public investment, which counts for around 30% of total investment, declined by 4.5% y/y, contributing to the moderation in growth of gross fixed capital formation.
Foreign trade contracts and net exports fall
Despite a moderation in imports growth to 1.3% in the first quarter from 4.0% in the fourth quarter of 2015, the decrease in exports has led to a significant 12.4% y/y drop in net exports. For an open economy and a large net oil exporter like Malaysia, softer external demand had been anticipated. China's economic slowdown also brings about the negative transmission effects to the Southeast Asian manufacturing supply chain, giving an additional downward pressure on the exports sector. In addition, the boost to exports from the steep currency depreciation in the last quarter of 2015 has mostly faded in the first quarter, as the Malaysian currency has been gradually recovering. The above factors have been somewhat cushioned by the steadily growing demand of manufacturing shipments to the United States.
Manufacturing, services, and construction growth offsets impact of low fuel prices and dry weather
From the supply-side perspective, the services and manufacturing sectors, which make up more than half of Malaysia's GDP, still have a significant role to play in driving economic growth. In addition, construction sustained its strong expansion, rising to 7.8% y/y in the first quarter from 7.5% y/y in the previous quarter, boosted by rapid growth in civil engineering, which was up by 17.5% y/y. In contrast, the mining sector continued to suffer from weak global fuel prices, posting only a marginal increase of 0.4% y/y, while agricultural production has also been heavily dampened by the El Nino weather pattern, registering a 4.1% contraction.
Outlook and implications
Although the Malaysian economy's growth may slow further in the second quarter, private consumption is seen to be relatively resilient. Household spending should improve further in the second half of 2016 as the impact of GST will gradually fade away, and civil servants will receive a higher salary from July 2016. The growth in the economy will also be helped by improved commodities production from the diminishing effects of El Nino. On the other hand, the decelerating fixed investment growth is a concern, especially given the slowdown in private credit. The broad money supply growth hit an all time low of 0.9% y/y in March, and Bank Negara Malaysia notes that the weakness is largely stemming from reduced private sector lending, probably reflecting the weakness in household and company lending. The outlook for foreign investors' interest in Malaysia is also uncertain, given the overall reduced investor appetite in the emerging markets and the heightened domestic political risk. However, the large pipeline of megaprojects should help ease the pressure in the coming years; these include the Petronas RAPID petrochemicals megaproject in Johor and public infrastructure megaprojects such as the MYR29 billion Pan-Borneo Highway in Sarawak and Sabah.
Given a weaker first-quarter GDP reading and rising risks to fixed investment, we have lowered our GDP forecast for 2016 to 4.2% y/y from 4.3% y/y. Furthermore, concerns over weak oil prices and China's slowing economy will remain a drag on the economy's growth. Even as we expect the economy to show a modest turnaround from the second half of 2016 onwards, the short-term risks to growth remain firmly on a downside. We anticipate the GDP will slightly strengthen from 4.2% y/y in 2016 to 4.4% y/y in 2017, rising further to 5.1% y/y in 2018.