Although the Malaysian economy depends heavily on export-led growth, a spurt in domestic demand has offset weakness in the external sector, allowing Malaysia to outperform its regional peers.
Malaysia’s GDP growth exceeded market expectations in Q3 2012, rising 5.2 percent over the previous year. Moreover, GDP growth for Q2 was revised up to 5.6 percent from the previous estimate of 5.4 percent. Malaysia’s strong performance comes as a surprise amid broad-based weakness among its regional peers. Domestic demand offset the external-sector drag on economic growth and rose at a healthy 11.4 percent in the June–September period. However, both domestic demand and private consumption experienced slower growth compared to the previous quarter. Yet, Malaysia is expected to achieve—or even exceed—its 2012 growth estimate of 5 percent.
Better labor market conditions, government cash handouts, and payments to civil servants boosted private consumption expenditures. In addition, capital spending also registered a strong performance and rose by a staggering 22.7 percent over the previous year. Public and private sector capital investment in the transportation, oil and gas, and utilities sectors propelled capital investments during Q3 2012. Investment growth of this magnitude augurs well for the Malaysian economy and could potentially result in higher growth rates for the economy in the coming years. However, investment growth levels of over 20 percent are unlikely to continue in 2013.
Meanwhile, total vehicle production grew 4.6 percent in October compared to the previous year. Production of both passenger and commercial vehicles registered an increase. Furthermore, new vehicle sales were up 3.2 percent year-over-year, and up 1.9 percent from the January–October period in 2011. In addition, agricultural sector growth inched into positive territory in Q3 2012, owing to a recovery in palm oil production. The construction sector remained robust, and services growth was supported by strong domestic demand. On the other hand, economic activity in manufacturing was weighed down by weak external demand, and the mining sector contracted due to a drop in gas production.
Malaysia’s current account surplus ebbed slightly during the third quarter. The surplus on exported goods was offset by a deficit on income payment and services. Furthermore, the financial account experienced a net outflow as outward foreign portfolio investments and direct investments abroad outpaced inflows. As a result, the overall balance of payments recorded a deficit of nearly $2.5 billion in Q3 2012. Although exports surprised on the upside in September, export growth has been relatively muted this year. Export growth was supported by modest increases in exports to Singapore, Indonesia, and the United States while demand from Europe fell. The current trend will likely continue till the end of the year, but exports are expected to recover in 2013.
The construction sector remained robust, and services growth was supported by strong domestic demand.
The annual rate of consumer price inflation stood at 1.3 percent in October, unchanged from September. This also represents the lowest rate of inflation since November 2009. Food price inflation moderated from 2.4 percent in September to 2.0 percent in October. However, the non-food component of the index rose 0.3 percent to reach 1.1 percent. Price pressures remain subdued, but inflation might have bottomed-out. The government’s subsidy-rationalization program and the introduction of a general sales tax could result in higher inflation in the coming months. Moreover, the sustained expansion in domestic demand could also lead to an uptick in inflation.
Downside risks to Malaysia’s growth are likely to emanate from weak economic conditions in Europe and the United States. Robust domestic consumption emerged as the main driver of growth in an economic framework that is heavily dependent on exports. In all likelihood, Malaysia’s growth momentum will continue through the fourth quarter of 2012, despite uncertainties in the export sector.