As a major producer and exporter of crude oil, natural gas, and palm oil, Malaysia's economy was bound to be buffeted by the plunge in demand and prices for hydrocarbons and other commodities. Net external demand dragged down Gross Domestic Product growth in the first half of 2015.
|Selected economic indicators (%)||2015||2016|
|ADO 2015||Update||ADO 2015||Update|
|Current Account Balance (share of GDP)||3.3||2.7||4.5||3.2|
Growth in private fixed investment in Malaysia decelerated, and public fixed investment actually declined. Private consumption held up well, though it moderated after April, when the government implemented a tax on goods and services as part of fiscal reform. Gross Domestic Product growth slowed to 5.3% in January–June.
Inflation was unexpectedly low at an average of 1.7% year on year in the first 7 months, even as the new tax on goods and services and the ringgit’s depreciation put some upward pressure on prices from the second quarter.
The inflation forecast for 2015 is revised down, but the forecast for 2016 is retained. Turning to trade, merchandise exports slid by 13.7% in US dollar terms in the first half, and imports fell by 12.0%. The current account surplus was cut by more than half from the same period in 2014.
The economy is seen slowing further through the second half to match in the full year the forecast made in March. Private consumption faces headwinds from sagging consumer confidence, the new tax on goods and services, slowing growth in credit to households, and signs of softening in the labor market.
Business sentiment has been hurt by lackluster prospects for exports, a sharp depreciation of the Malaysian ringgit, a slide in stock prices, and spare manufacturing capacity. In 2016, investment is projected to strengthen on prospects for improved economic growth in the major industrial economies and some improvement in demand for oil and commodities. The government is looking to stimulate growth through fiscal policy but is constrained by its pledge to narrow the budget deficit. Concerns about high household debt and capital outflows could weigh against easing interest rates. Economic growth is still seen edging up in 2016 but more gradually than expected in March.
Forecasts for current account surpluses are lowered from March.
Excerpted from the Asian Development Outlook 2015 Update.