Articles
14 February 2018

Another upside surprise from Malaysia’s growth

Growth allows for continued normalization of Bank Negara Malaysia's monetary policy this year. We expect the Malaysian ringgit to remain one of Asia's outperforming currencies  

5.9%

GDP growth in 2017

Better than expected

Six quarters of above-expected growth

In yet another upside surprise, Malaysia’s GDP growth came in at 5.9% year-on-year (consensus 5.8%, ING forecast 5.5%) in the final quarter of 2017. This was only a modest slowdown from the three-year high of 6.2% reached in 3Q17. This was also the sixth consecutive quarter with an upside growth surprise. Full-year growth, also 5.9%, beat the official forecast of 5.2-5.7%, making it the best year for the economy in the last three.

Powered by strong domestic spending

Besides a positive terms-of-trade shock from an upturn in global commodity prices since 2016 (see chart) the economy has been powered by firmer domestic spending. Private consumption contributed 3.7 percentage point (ppt) to headline GDP growth in the last year and fixed capital formation 1.6ppt, up from 3.1ppt and 0.7ppt in 2016. The contribution of government consumption improved to 0.7ppt from 0.1ppt over the same year, while net exports were a drag only to the extent of 0.1ppt. On the industry side, services (3.6ppt) and manufacturing (1.6ppt) remained the main growth drivers.

Positive terms of trade shock

 - Source: Bloomberg, ING
Source: Bloomberg, ING

A favourable growth-inflation dynamic

On the domestic side, the election-related increase in government spending should help sustain momentum and keep GDP growth above 5%, which is where the official projection of 5-5.5% has it (ING forecast and consensus 5.3%).

Expansionary fiscal policy in the election year will be inflationary while rising global commodity prices may add to domestic inflation pressure. But as of now, things don’t look that bad. The high base effects and appreciating Malaysian ringgit (MYR) are expected to mitigate inflation, possibly keeping it close to the low end of the government’s 2.5-3.5% forecast (consensus 2.7%, ING forecast 3.0%).

Policy implications

The strength of the economy allows for continued normalization of Bank Negara Malaysia's monetary policy this year. BNM started normalization in January with a 25 basis point policy interest rate hike. We forecast one more 25bp policy rate hike in the third quarter. We also expect the MYR to retain its status as one of Asia’s outperforming currencies this year. Our end-2018 USD/MYR forecast is 3.72 (spot 3.93, consensus 3.85).


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).