KUALA LUMPUR, Aug 12 ― A tepid trade performance and weak domestic consumption likely pulled down Malaysia's economic growth in the second quarter to its slowest pace in more than two years.

The median in a Reuters poll was annual growth of 4.5 per cent, which would be the lowest since January-March 2013.

In this year's first quarter, Malaysia had growth of 5.6 per cent, stronger than most of its counterparts in Southeast Asia, as domestic demand was buoyant.

But in April, Malaysia implemented a 6 per cent goods and services tax (GST). That, together with plunging commodity prices and a sliding currency, hurt consumption.

“The economy slowed in 2Q15 on the back of the implementation of GST, which led to softer sales and production in the domestic-oriented manufacturing sector,” said Ambank in its research note.

The second quarter included half of the Muslim fasting month of Ramadan, which normally brings high consumption. But retailers said GST contributed to sales plunging as much as 20 per cent from a year earlier.

Tumbling currency

Analysts say there remains downside risks to growth, including political uncertainty. Prime Minister Datuk Seri Najib Razak is battling allegations of graft, which he denies, and of mismanagement involving state fund 1Malaysia Development Berhad (1MDB), which has debts of over US$11 billion (RM44 bilion). He is chairman of 1MDB's advisory board.

“Tail risks around 1MDB and politics remain, which may continue to weigh on business sentiment,” said Bank of America Merrill Lynch in a research note.

Amid weakened global demand for Malaysia's exports, the ringgit has been the worst performing emerging Asian currency this year. It has lost more than 12 per cent against the greenback and reached 17-year lows.

Some economists expect a trade recovery for Malaysia in the second half in spite of China's devaluation of the yuan, which will make Chinese exports more competitive.

Malaysia's non-commodity export sector “looks set to benefit from the sharp depreciation of the ringgit,” Capital Economics said in a note prior to China's devaluation.

Krystal Tan of Capital Economics said today that if China's move is a one-off adjustment, then there might not be a big impact on Malaysia's exports.

“In terms of competitive gains, Malaysia is still better off than most economies in Asia,” she said. ― Reuters