KUALA LUMPUR: Global banking group Standard Chartered expects Malaysia’s gross domestic products (GDP) to moderate in 2017 to 3.8 per cent from a projected 4.2 per cent in 2016 on the back of slower domestic demand.
“We expect domestic demand, the main source of growth, to soften and moderate further in 2017. While domestic demand should partly offset weak external demand, it is likely to soften,” said Edward Lee, Standard Chartered head of Asean Economic Research, at the bank’s global research briefing here today.
“The resilience in consumer demand this year has been due to one-off measures, and labour metrics appear to be weakening as unemployment grows and we expect all these will play out in the second half of the year.”
The second half looks to be particularly challenging for the country as Bank Negara Malaysia reacts to the possible interest rate hike from the US Federal Reserve (Fed) sometime in May.
“We now expect Bank Negara to cut its policy rate by 25bps to 2.75 per cent in May 2017. Inflation is not a concern for the central bank although we are factoring a rise in inflation to 2.5 per cent in 2017 from two per cent in 2016 on the dissipation of low oil prices and the goods and services tax (GST) effect,” said Lee.
“We think another rate cut would support household debt servicing without causing a surge in household leverage, and market volatility is a potential swing factor for Bank Negara next year. We expect the central bank to weigh the short-term cost of loose monetary policy against the need to provide long-term growth support via lower interest rates amid volatile market conditions.”
The bank expects the local market to continue to be driven by private investments.
“Government consumption may remain steady and is unlikely to provide upside for growth. The government has maintained its fiscal consolidation stance for 2017, targeting a smaller deficit of 3 per cent of GDP (versus 3.1 per cent in 2016). It has to strike a balance between a challenging revenue environment and the need to support growth,” Lee said.
On the investment front, the bank expects public enterprises to pick up some of the slack from lower development expenditure by the government (down to 3.4 per cent of GDP in 2017 from 3.6 per cent). Total construction contracts awarded rose 40 per cent year-on-year in the first nine months of 2016.
“We expect investment growth to stay steady at about three per cent in 2017,” he added.