This followed recent below-expectation 2Q growth in Indonesia and Thailand.
Sluggish exports continued to weigh on the GDP in 2Q13 as it contracted by 5.2% y/y. Weaker imports also reflected some moderation in private consumption demand during the quarter.
Nonetheless, overall consumption strengthened in 2Q13 as the moderation in private consumption was more than compensated by sharp growth in government spending which was mainly due to higher expenditure on supplies and services as well as higher wages.
Despite the slower fixed investment growth of 6.0% y/y in 2Q13 compared to 13.1% in 1Q13, we are comforted by the breakdown showing that private sector’s fixed investment has actually improved.
As first half growth eased to 4.2% y/y, Bank Negara has lowered its full-year GDP growth forecast to 4.5-5.0% from 5.0-6.0% projected earlier.
We now expect 2013 GDP growth to be 4.5% vs our earlier estimate of 4.7%.
Nonetheless, our projection still suggests some strengthening in growth in the next two quarters with some recovery in external demand expected to provide some boost.
Meanwhile, domestic demand will continue to be supported by the wage growth and a stable employment outlook.
Impact on FX and Monetary Policy
Headline inflation was still modest at 2.0% y/y in Jul, albeit having picked up from 1.8% in June.
While inflation could edge higher in the coming months, we expect the full-year to average 1.9%, down from our earlier forecast of 2.2% as inflation was just 1.7% in the first seven months.
Weak growth and low inflation is expected to keep Bank Negara on hold at 3.00% for the rest of this year.
USD/MYR steadied today after trading to a 3-year high of 3.3043 on Tuesday.
Data today showed that 2Q13 current account has remained in surplus and was above consensus expectation at MYR2.6 bn (consensus: MYR0.9 bn ; 1Q: MYR8.7bn). That could provide some respite to the MYR after the recent sharp depreciation against USD.
Nonetheless, below-consensus GDP and increasing attention given to Malaysia’s fiscal and debt positions in the backdrop of US QE tapering expectation will likely keep USD/MYR at around 3.30 by end-3Q13.
Fitch has cut its outlook on Malaysia’s sovereign credit rating to negative from stable on July 30 citing its rising debt levels and lack of budgetary reform, while Moody’s maintained a stable outlook last week.
Investors will turn their attention to Budget 2014 which is likely to be tabled on 25 Oct, as Malaysian Prime Minister Najib is set to announce strategies to address the country’s deficit and debt concerns.
Written by UOB Economic Treasury Research
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