This article first appeared in The Edge Financial Daily on May 18, 2018 - May 24, 2018

KUALA LUMPUR: The economy expanded in the first quarter of 2018 (1Q18) by 5.4% year-on-year (y-o-y) — the weakest in five quarters and marginally below the market consensus forecast of 5.5%. But economists are unperturbed by the lower growth rate as it still remained above 5%.

“You cannot underestimate the significance that the growth levels seen in Malaysia are still far beyond that are noted in the developed world,” said Jameel Ahmad, the global head of currency strategy and market research at FXTM, a foreign exchange trading group.

Noting that the growth figure serves as a reminder of the “robust nature” of the Malaysian economy, Jameel said there is no reason to be concerned about the performance of the domestic economy.

“As long as the economic growth in Malaysia remains above 5%, authorities do not have a reason to be concerned about the performance of the domestic economy. The year 2017 as a whole was viewed as an economic performance that defied even optimistic expectations at the turn of the same year, and it is unrealistic to compare 2018 to 2017 on that basis,” he said in a note yesterday.

Meanwhile, MIDF Research painted the quarterly gross domestic product (GDP) growth rate as following an “upbeat momentum”, which was in line with steady industrial production, manufacturing sales and trade growth throughout the quarter.

Speaking to the media at a briefing yesterday, Bank Negara Malaysia (BNM) governor Tan Sri Muhammad Ibrahim attributed the GDP growth in 1Q18 to support from private consumption and continued investments amid solid demand.

While it lagged behind China and the Philippines, which both recorded a GDP growth rate of 6.8% in 1Q18, it continued to outshine other regional peers.

Moving forward, BNM expects growth to remain favourable in 2018, with domestic demand continuing to be the key driver of growth. BNM kept its GDP growth forecast at between 5.5% and 6% for this year.

Growth prospects are further supported by continued positive spillovers from the external sector into domestic economic activity, Muhammad said at a media briefing yesterday.

With the 1Q18 GDP growth in line with its projection, UOB Malaysia senior economist Julia Goh maintained the group’s 5% growth forecast for 2018. However, she expects growth to trend lower in the second half of 2018 (2H18) and average at 5% this year, weighed by a higher growth base of 6.1% in 2H17 as well as near-term policy uncertainties with regard to project reviews.

MIDF Research took a more optimistic approach, saying the impact of the global trade war is receding, given that business indicators of major and emerging economies are still showing optimistic signals.

“We forecast GDP growth to average at 5.5% in 2018,” the research house said in a note yesterday.

Too early to assess GST’s impact on inflation

With the zero-rated goods and services tax (GST) taking place from June 1, Muhammad said it will affect the central bank’s inflation forecast, although it is still too early to determine its impact.

“It is too early for us to calculate right now. The first-quarter inflation figure was slightly outside our full-year forecast of 2% to 3%, but with new information coming in, we will look at it again and revise the inflation rate [forecast] if need be,” he said.

As for the impact of other changes in fiscal policy, Muhammad said it can only be assessed once all the initiatives planned by the Team of Eminent Persons have been announced.

“As far as monetary policy is concerned, it has always been accommodating the growth trajectory. We will not ignore the implications of fiscal policies,” he said, adding that BNM will consider both, as well as the state of oil prices, to look at how it can support growth.

Headline inflation declined to 1.8% in 1Q18, reflecting the smaller contribution of domestic fuel prices due to a smaller increase in global oil prices and a stronger ringgit exchange rate.

For the full year of 2018, headline inflation is projected to average around 2% to 3% due to a smaller contribution from global cost factors and a stronger ringgit exchange rate compared to 2017.

“Underlying inflation, as measured by core inflation, is also expected to remain small, due to smaller cost pass-through to retail prices compared to 2017,” said BNM in its press release.

What matters when it comes to GST abolishment is that businesses pass on its benefits to consumers, Muhammad said, noting that there should be an immediate decline in cost.

“On top of that, the relevant authorities should [make sure] this is being done, so that consumers benefit from the GST reduction,” he said.

Current account surplus at three-year high

Muhammad highlighted that the current account surplus had increased in 1Q18 to the highest level since 2Q14 at RM15 billion, equivalent to 4.5% of gross national income.

“Malaysia’s current account is expected to remain in surplus as the goods surplus will continue being supported by strong global demand and higher oil prices,” he said.

However, the services and income deficit will remain a drag on the current account due to continued reliance on foreign service providers and labour, he said.

Private consumption growth, on the other hand, sustained at 6.9% y-o-y in 1Q18, driven by continued private-sector wage growth of 6.6% and an increase in employment.

Going forward, private consumption is expected to be sustained by strong income growth, sustained employment and continued support from government measures.

Private investment growth moderated to 0.5% y-o-y in 1Q18, against a high base of 12.9% in 1Q17, due to lower growth in structures and machinery and equipment investments.

“This was in line with a contraction in capital reforms. However, this contraction was amplified by the exceptional growth in capital imports in 1Q17 [which stood at 42%],” said Muhammad, adding that the contraction was also weighed down by lower capital spending on residential and commercial property, mainly in the high-end residential office segment.

MIDF Research projected private investment to pick up modestly on the back of rising commodity prices and political stability seen following the 14th general election.

Meanwhile, BNM expects export growth to moderate going forward, though it will remain on an above-average trend, on the back of sustained demand from key trading partners, continued expansion in the global technology cycle and increased domestic production capacity, BNM said.

The export growth of 3.7% in 1Q18 was lower than 6.7% in 4Q17, largely due to a high-base effect and a slowdown in exports of commodities.

“We predict Malaysia’s exports to grow by 9.3% in 2018,” MIDF Research said, adding that this will be supported by further domestic economic expansion and development.