KUALA LUMPUR, Dec 18 ― Malaysia's economy is expected to expand at a slower pace in 2016 and continue to moderate in 2017 due to a slowdown in domestic demand following Putrajaya's commitment to staying the course for fiscal consolidation, the World Bank said in a study released today.
In the report “Malaysia Economic Monitor: Immigrant Labour”, the international financial institution maintained it forecast for the country's real gross domestic product (GDP) growth at 4.7 this year but revised its previous projections of 4.7 per cent in 2016 and 5.0 per cent in 2017 to 4.5 per cent for both years.
The revision, it said, is premised on three key factors: the easing of private consumption growth, the continuation of low oil prices, and the effect of low commodity prices on exports.
It said private spending is “not likely to pick up substantially” in the near term as Malaysian consumers struggle to adjust to higher living costs, estimating consumption to expand by 5.3 per cent next year and contribute 2.8 percentage points to growth.
“These estimates are driven by the muted expansion of household spending in Q2 and Q3 2015, which suggests that consumers are adjusting more slowly and cautiously to new income and price realities in a context of heightened uncertainty,” the report said.
“Although firm labour markets, increased BR1M cash transfers and an accommodative monetary policy are likely to mitigate these effects, policy space to boost private consumption is limited as the government continues on a fiscal consolidation path into 2016 ― 2017,” it added, referring to the Bantuan Rakyat 1Malaysia cash aid handed out by Putrajaya annually to poorer households.
The report said domestic demand is expected to remain the key driver of Malaysia's economic growth, contributing 4.7 percentage points to GDP growth this year and 4.6 percentage points in 2016.
“Domestic demand is projected to grow by 5.1 per cent and 5.0 per cent in 2016 and 2107, respectively, and remain the main driver of growth in a context of soft global demand,” an executive summary of the report said.
World Bank Senior country economist for Malaysia Rafael Munoz Moreno, who was one of the authors for the report, said that given the current challenges, Putrajaya has introduced and implemented “quite sound and reasonable” policies to keep the economy in check.
“Basically, internally trying to shore up fiscal deficit, and to do that they introduced the GST and removed a fuel subsidies, that have been enough to compensate for the loses in the oil related revenue, and to keep containing the fiscal deficit,” he told Malay Mail online yesterday from his office here at Sasana Kijang.
In the report, Putrajaya's move to introduce the Goods and Services Tax (GST) and scrap fuel subsidies were similarly described as “timely and critical” reforms.
The removal of fuel subsidies, it said, led to savings of 0.9 per cent of the GDP while GST collection is expected to amount to 2.3 per cent of the GDP this year.
“Together, these compensate for losses from foregone oil-related revenue amounting to 2.2 per cent of GDP,” it said.