Malaysia economy expands 8.9% in Q2, exceeding majority of forecasts

• Aug 15, 2022

Malaysia’s economy expanded by 8.9 per cent year-on-year in the second quarter of this year, mainly supported by domestic demand, improving labour market and resilient exports, said Bank Negara governor Nor Shamsiah Mohd Yunus.

The announcement by the central bank on Friday (Aug 12) also exceeded the majority of forecasts by various analysts, which ranged between 5 per cent and 8.5 per cent for the April-June period.

A recent poll by Reuters had expected an announcement of 6.7 per cent growth in gross domestic growth (GDP) from a year earlier.

The 8.9 per cent figure was significantly higher than the 5 per cent growth in the first 3 months of this year. Quarter-on-quarter, the country recorded GDP growth of 3.5 per cent.

Speaking at a press conference, Nor Shamsiah said the country’s border reopening in April this year had boosted economic growth, especially in the manufacturing and services sectors.

“The services sector, which saw a growth of 12 per cent year-on-year in the second quarter, was supported by higher consumer spending amid transition to endemicity, reopening of international borders and additional policy support,” she said.

She added that strong demand for semiconductors and consumer-related products have boosted manufacturing sector growth, which expanded 9.2 per cent year-on-year in the second quarter this year.

The governor anticipates the growth momentum to continue in the third quarter this year and might exceed the growth achieved in the second quarter of the year, mainly due to low base effect and robust domestic and external demand as the world is in recovery.

Bank Negara maintained its full-year GDP growth forecasts of between 5.3 per cent and 6.3 per cent.

“With a 6.9 per cent growth achieved in the first half of this year, we are no longer in crisis. The firm domestic demand and recovering tourism activities will continue to support economic expansion,” she said, adding that the robust expansion has shown early signs of demand-driven inflation which led to the central bank’s monetary tightening measures.

“The gradual adjustment in overnight policy rate (OPR) is to avoid stronger measures in the future. Moving forward, Bank Negara remained a gradual and accommodative stance in interest rate adjustment,” she emphasised.

Malaysia has increased the OPR by 25 basis points (bps) to 2.25 per cent in July this year, after the hike of 25 bps in May 2022. Before this, the OPR has stayed at record low of 1.75 per cent since July 2020. Earlier, industry observers expected a further 25-50 bps hike in the second half of the year.

Malaysia’s headline inflation increased to 2.8 per cent in the second quarter, from 2.2 per cent in the first quarter of this year. Core inflation increased to 2.5 per cent, up from 1.7 per cent in the first quarter of 2022.

The rate of inflation was mainly driven by elevated commodity prices, strong domestic demand and weakening ringgit, said Nor Shamsiah, adding that the rate will be contained by government’s subsidy.

“We are in an environment of strong US dollar. Following the Federal Reserve’s interest rate hike of 125 bps, all currencies are depreciating against the US dollar. However, ringgit remained broadly stable against major trade partners,” she said.

The ringgit has depreciated about 6.5 per cent year-to-date to RM4.4388 against the US dollar on Friday from RM4.1763 on Jan 1, 2022, following the decision by the US Federal Reserve to increase interest rates.

Separately, Bank Negara also issued a statement on Friday to say that Malaysia’s payment systems remain secure despite a potential data breach announced by payment gateway service provider iPay88.

Nor Shamsiah said the central bank knew of the incident at the end of July and has take immediate action to inform the banks to take precautionary measures to secure consumers’ data.

She noted that the breach is from and is confined to iPay88’s payment card systems and does not involve vulnerabilities in the banks’ systems.

“The forensic investigations are still ongoing, we will wait for the investigation report before taking any action,” she said.

On Malaysia growing at the fastest pace in a year, CGS-CIMB Securities head of economics Nazmi Idrus believed the growth momentum will continue into the third quarter and the country might even achieve double-digit growth in July-September.

“Economy has rebounded strongly since the border reopened in April this year, the after-effect is expected to continue supported by pent-up demand and low base effect,” he told The Business Times.

However, he noted that the inflation pressure continues to be the main concern due to global supply chain disruption and weakening ringgit. “However, we are seeing the inflation start to ease as commodity prices – crude oil, palm oil and other vegetable oil – are trading downtrend.”

With anticipation of the growth momentum to continue, Barclays Research has raised the full year GDP growth forecast to 7.5 per cent and expect Malaysia’s central bank will increase the interest rate in September and November’s MPC policy meetings.

Oxford Economics lead economist Sian Fenner shared the same view in a report on Friday, she noted that a 25 bps hike on OPR to 2.5 per cent “is a near sure thing” and there is also a higher chance of another 25 bps rise in November.

She noted that the strong growth momentum is expected to ease over the second half of the year amid tailwinds from the shift to “living with Covid” and rising external headwinds.

Other than low base and stronger consumer demand, Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-economic Research Centre, said other significant catalysts include Hari Raya festive spending and robust tourism activities.

“The question is there will be less catalyst in the second half of the year but inflationary pressure is going to stay due to supply chain disruption. People will continue to feel the pinch of the high cost of living and rising interest rate, this will affect their spending,” he said.

Source: https://www.businesstimes.com.sg/asean-business/malaysia-economy-expands-89-in-q2-exceeding-majority-of-forecasts