Rising domestic and international demand for goods and services saw Malaysia exceed GDP growth expectations this year. However, despite strong performances in most sectors, imbalances in the property market could pose a risk to economic growth heading into 2018.
Malaysia’s economy gained momentum throughout the year, according to the latest quarterly bulletin issued by the central bank, Bank Negara Malaysia (BNM); GDP expanded by 6.2% year-on-year (y-o-y) between July and September, up from 5.8% in the second quarter and 5.6% in the first.
The BNM said that due to the strong performance in the third quarter – the first time growth has exceeded 6% since 2014 – full-year expansion was on track to register at the upper end of official projections of between 5.2% and 5.7%.
Expansion bolstered by high domestic demand and external sector
Accelerating growth has been fuelled by more favourable economic conditions both at home and abroad.
According to a report from the Ministry of Finance, domestic demand rose by 6.7% in the first half of 2017, building on the 4.7% increase recorded in the first half of last year. This was supported by robust household consumption and rising private sector investment, which are forecast to increase by 6.9% and 9.3% this year, respectively. Much of this investment was concentrated in the manufacturing and services sectors, with the former seeing higher levels of capital spending in both export- and domestic-focused activities.
The external sector is also a key contributor; total trade increased by 22.6% between January and August this year, a sharp rise on the 0.6% recorded over the same period in 2016, according to the ministry. Export growth is being led by electrical and electronics products, with export earnings up 21.4% compared to 2.3% in 2016.
Moderate inflation, interest rate remains unchanged
Core inflation remained stable this year, mainly due to lower domestic fuel prices, which were another factor behind strong household consumption. Meanwhile, headline inflation, which stood at 3.9% between January and August, is expected to close out the year at the upper end of its projected bracket of 3% to 4%, according to the BNM.
As a result, the central bank kept its benchmark overnight policy rate at 3% in November, with the rate remaining unchanged since July last year.
With the bank’s monetary policy committee due to meet again in January, some analysts predict interest rates will be raised as a result of this year’s strong economic performance.
Favourable economic trends projected to continue
The positive economic trends are expected to continue in the near term, with recently tabled budgetary papers providing a positive outlook for Malaysia’s economy heading into 2018. State revenue is expected to increase by 6.4% to RM239.9 ($49.8bn), and the fiscal deficit is forecast to drop from 3% to 2.8% of GDP.
Expansion will continue to be underpinned by robust domestic and external conditions. Export growth in 2018 is expected to rise by 3.4%, building upon this year’s 16.6%, with real GDP predicted to grow by between 5% and 5.5%.
However, the ministry also sounded a note of caution, citing rising protectionism, uncertainty over the policies in many advanced economies and turbulence in financial markets as factors that could impede growth.
Oversupply of real estate
Despite the overall positive outlook, concerns have been raised over the real estate sector, as oversupply in some segments has the potential to affect the broader economy.
In mid-November Tan Sri Muhammad Ibrahim, the governor of BNM, told local media that the number of unsold residential properties had reached decade-high levels, with particular excesses in the mid- and upper-price ranges. Additionally, a strong flow of new office and retail properties in the development pipeline – 140 malls are expected to open in key areas, including Klang Valley, Penang and Johor – could further add to imbalances in the market.
While growth in the coming year may help soak up some of this excess supply, the sector remains exposed to any unforeseen shocks the economy may experience in 2018 and beyond.