StanChart Research: Malaysia's GDP growth to moderate in second half

PETALING JAYA: Standard Chartered (StanChart) Research which had revised its full-year gross domestic product (GDP) growth forecast for Malaysia to 5.4% from 4.6% following a strong first-half economic performance, expects growth to moderate in the second half of the year.
The research house said the strong first-half GDP growth of 5.7% was driven by resilience in private consumption, increase in private investment and pick-up in exports.
It, however, expects private consumption to ease going forward.
“Domestic spending in the first half was likely boosted by one-off measures, including the minimum wage increase and voluntary employee pension contribution cuts. Higher BR1M (cash assistance to low-income households) may have also helped, but this was likely reduced by lower subsidies. Consumption may have been boosted by higher rural income due to the commodity price recovery.
“We think some base effects of the one-off measures may weigh on consumption growth in the second half. Furthermore, the slightly negative real wage growth may affect consumption (empirically, we found that real wage growth affects private consumption with a lag of about three quarters),” StanChart said.

StanChart was alarmed by the strong pace of growth which it said could increase the risk of a pick-up in core inflation. According to StanChart, if growth continues to surprise on the upside, expectations for an interest rate increase by the central bank may also build up.
“In the latest monetary policy statement in July, Bank Negara Malaysia (BNM) noted that underlying inflation (measured by core inflation) will be sustained by more robust domestic demand but is expected to remain contained.
“We think BNM is comfortable with the current accommodative monetary policy settings and maintain our view of no change in the policy rate for 2017, while keeping a watchful eye on core inflation even as headline inflation has eased since its peak in first quarter,” the research house said.
The export sector is set to be affected by unfavourable base effects such as the fading boost from high commodity prices and moderating external demand.
The softening growth in China, which is the primary source of demand for exports, may also impact export growth.
StanChart also displayed a cautious sentiment on the sustenance of the momentum of private investment which was driven by ongoing infrastructure projects and a pick-up in external demand as well as foreign direct investment.
However, loans disbursed have eased in the second quarter compared with the first, while construction projects have fallen steadily over the last few quarters.
Private investment were supported by ongoing infrastructure projects and a pick-up in external demand together with foreign direct investments, in the first half.

StanChart remains somewhat cautious on the sustainability of this strong momentum however, as loans disbursed eased in the second quarter from the first, as construction projects have fallen steadily over the last few quarters.