Country Economic Forecasts > Malaysia

GDP growth slowed to 4.7% in Q3 from 4.9% in Q2 as household spending, the key engine of growth until recently, decelerated for the second consecutive quarter. In contrast, both public and private investment picked up, and for the first time in a year, net exports made a positive contribution to annual growth, driven by a solid rebound in exports. This development and the continued robust gains in manufacturing production suggest that the competitiveness of the traded goods sector has improved as a result of the sharp fall in the MYR this year. Notwithstanding the positive aspects in the Q3 data, GDP growth is expected to lose further traction over the coming quarters as private sector demand continues to moderate. Increasing debt service costs and slower employment growth is expected to weigh on household spending. Furthermore, the recovery in private investment in Q3 is unlikely to be sustained against a background of high economic uncertainty and low capacity utilisation rates. Government infrastructure spending can only provide a limited offset given the constraints on the governments finances. Meanwhile, the central bank, faced with a weak and still vulnerable MYR, does not have room to reduce interest rates. That said, we believe that BN has a higher tolerance towards a weaker MYR and that, in the absence of a global shock that precipitates large capital outflows, interest rates will remain on hold in the short term. Looking ahead, however, the weak MYR will feed into stubbornly high CPI inflation and eventually prompt an interest rate hike in H2 2016.