Domestic demand and exports fuel Malaysian growth

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The economy defied expectations in Malaysia by maintaining a high level of growth in the first half of 2014 at 6.3%, according to new figures released in mid-August, though any weakening in exports could see the rate of expansion ease marginally towards the end of the year and into 2015.

GDP in the second quarter surged by 6.4%, the strongest growth since the fourth quarter of 2012, and ahead of analyst expectations. "The very strong export performance was better than expected," the governor of Bank Negara, Zeti Akhtar Aziz, told journalists at a press conference. "It's very likely that the overall growth for the year will exceed growth projections made earlier,” the head of the central bank added.

Growth in the first half was fuelled by continuing strong domestic demand, despite Bank Negara pushing up interest rates in July by 25 basis points to 3.25% with further interest rate hikes likely. The intervention is aimed at reining in household spending and keeping a lid on inflation, which was running at 3.3% as of June.  

Possible headwinds blowing from abroad

Growing demand at home was matched by a rise in exports, with shipments up 8.8% in value for the second quarter, led by strong sales of electronics and manufactured products, and outpacing the 7.9% increase in the first three months of the year. However, it is possible the contribution of overseas sales to GDP could weaken.

The Malaysian economy is built around international trade, with export revenues in 2013 equal to 83% of GDP, according to the Department of Statistics (DoS), making it more sensitive to fluctuations in the global economy.

With a number of leading economies, including Germany, France and Japan, either seeing their GDP retreat or stagnate in the second quarter, global recovery may be further off than predicted, while the threat of a hard landing in China is still seen as a near-term risk to the Malaysian economy.

“Moving forward, we hold our view that the strength of exports would likely soften in the second half of 2014, on account of uncertainties in the advanced economies due to heightened geopolitical concerns,” said Manokaran Mottain, economist at AllianceDBS Research quoted by local press from a research note.  

Budget boost

However, any potential scaling back of exports could be offset by increased state spending next year. On August 12, Prime Minister Najib Razak said the 2015 budget, to be tabled in October, would contain a number of initiatives to further promote economic growth, including increased spending on infrastructure development, fiscal support for low-income earners and low-cost housing developments.

Among the main objectives of the 2015 budget, the prime minister said, were to keep inflation in check while maintaining living standards and balancing state finances.

To achieve the last goal, the government is to launch its biggest tax reform in many years, with the introduction of a goods and services tax (GST) in April 2015. The broad-based tax will see a 6% charge added to two-thirds of the 944 items covered by Malaysia’s consumer price index basket, though the list of exempted items will be expanded, Deputy Finance Minister Ahmad Maslan said on August 12. Basic foods like rice, flour and oil, as well as essential services like household water supply and public transportation are likely to be tax-free.

The government stressed that the GST is not an additional charge, but one that will replace the existing service and sales tax (SST), which is levied on a narrower basis, though at a much higher rate of 16%. Officials also believe the GST will push the state budget into surplus by 2020, allowing for increased funding for social welfare programmes in the future.

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