Malaysia, one of Southeast Asia’s largest economies,
continues to power ahead with healthy economic growth. Nevertheless, the
weaknesses in the U.S. and Eurozone are adding to the downside risks to economic
growth for the country. Policymakers are struggling with the constant need to
balance a slower global recovery against risks of escalating inflation
Strong Domestic Demand
Unlike the majority of its regional peers,
robust domestic demand continues to support strong economic growth in Malaysia
and should help the economy cushion growth amid a weakening global outlook.
Strong domestic demand is being driven particularly by robust household
consumption. Private consumption is expected to remain a key driver of economic
growth in Malaysia given recent improvements in the labor market.
Healthy output growth and robust household consumption are indicators
that domestic demand is expected to remain strong. Finally, the growing foreign
direct investment and high levels of government spending on improving the
nation’s infrastructure will also help boost investment in Malaysia. The
increase in investment, however, may be slowed given the weaknesses in the U.S.
and European economies, which are weighing on investors’ sentiments and
increasing risk aversion.
Easing Price Pressures
pressures in Malaysia have been easing during the last few months after about
five months of remaining relatively flat. Recent inflation data indicates a
significant fall in food inflation, which has been the main reason for the
moderation in consumer prices. Easing global commodity prices caused by
weakened global growth have also has helped to ease price pressures. The
downward trend in inflation justifies the government in Malaysia to pursue more
accommodative monetary policy and begin shifting focus from inflation to
Healthy Industrial Production Growth
Despite the weaknesses abroad, industrial production in Malaysia has
remained at trend. Domestic demand, driven by upbeat household and investment
activity, appears to be offsetting the weaker global demand. Petrochemical
manufacturing, a key driver in production for Malaysia, has remained upbeat
given the steady demand for these products. Given the current weight on exports
from Malaysia, however, it is expected that output will be under pressure in the
near-term as well.
Developing Malaysia’s infrastructure has been a major goal for
policymakers since having good infrastructure is crucial for economic
development. Poorly developed infrastructure reduces productivity in the
economy and often increases the costs associated with transportation and
communication. The increased costs have potential to erode the economy’s
ability to produce price-competitive goods and services in the global market.
While infrastructure has been improving, more improvement is necessary in order
to continue to impressive growth we have been seeing over the last few years.
Slower growth in the U.S. and Europe has dampened demand for Malaysian
exports. In particular, Malaysia’s commodity exports have weakened
significantly from easing regional demand. Weakening Chinese demand and
softness in India’s economy have added to the downside risk to export growth for
Unfortunately, weak global demand is also dampening global commodity
prices, further hampering the export outlook for Malaysia. We are seeing a
significant drop in oil exports as global commodity prices have trended lower.
Recovery of export growth will depend largely on economic growth in
Malaysia’s main export markets, which include Singapore, China, Australia, and
Japan. Meanwhile, import growth continues to grow as strong domestic activity
and increased infrastructure spending boosts demand for consumer, intermediate
and capital imports.
Currency Market Volatility
ringgit has been vulnerable to swings in sentiment. Before the global economic
downturn, the strength of the ringgit rose rapidly due to relatively strong
economic growth in the country and the interest by foreign investors to borrow
in countries with lower interest rates, such as the United States and Japan, to
purchase assets in countries with higher interest rates, such as Malaysia.
However, the ringgit has since fallen as investors responded to the euro-zone
debt crisis by selling off Malyasian assets.
Although the ringgit will
likely remain vulnerable to swings in investor sentiment, the currency will be
supported by a wide gap between local interest rates and those in advanced
economies. The economy’s healthy economic growth and current-account surplus
should boost the ringgit.
Overall, we see that while downside risks to Malaysia’s economy have
increased due to the weaknesses in the U.S. and Eurozone economies, the country
continues to power ahead with healthy growth. The economy’s robust domestic
demand and strong consumption and investment growth shields it from weaknesses
abroad. Growth for the economy is therefore expected to remain steady in the
near-term, while inflation pressures should remain subdued. Easing monetary
policy and robust domestic demand will help steer the economy through the
turbulent global outlook.