Malaysia economic growth likely to remain sluggish in Q2

Malaysia’s economic growth is likely to have expanded at a relatively sluggish pace during the second quarter of this year, following upbeat domestic demand, which shall keep the economy on a steady tone. However, external demand is likely to create a drag on the country’s gross domestic product.

Malaysia’s GDP growth figure for 2Q16, due today is expected to report an expansion of 4.2 percent y/y, unchanged from previous quarter. However, the pace of growth is likely to witness some resistance following a challenging external environment amid concerns of a slowdown in China.

Further, sluggish growth in the US and uncertainties surrounding Eurozone also pose risks to the Malaysian economy. In addition, commodity and energy prices have not yet recovered. This confluence of factors essentially means that there could be a marginal drag coming from net exports.

Moreover, private consumption should hold up after the GST effect has dissipated. Overall, domestic growth may become softer but still enough to offset the modest drag from the external front. However, with a steady growth output, there will be less pressure on the central bank to ease monetary policy further.

Meanwhile, Bank Negara’s most recent rate cut to 3.00 percent is deemed to be an insurance cut against potential downside risk to growth. If growth trajectory remains flattish as it is and without significant negative shocks in the external environment, then the Overnight Policy Rate (OPR) could well remain at the current level right through the rest of the year, DBS reported.