KUALA LUMPUR, June 30 ― Exports dropped by 17.2 per cent in the first quarter of 2016 as slow global growth weighed in on demand, the World Bank said in its Malaysian Economic Monitor report released today.

Malaysia's GDP is expected to grow at 4.4 per cent this year, but uncertainty over the global economic outlook pose significant risk to growth for Southeast Asia's third-biggest economy, the bank said.

“Private consumption growth mitigated the decline in private investment, particularly the oil and gas sector.

“Sluggish demand for commodities also led exports to decline by 17.2 per cent in 1Q 2016,” the report said.

Private consumption grew to about 4 per cent in the first quarter compared to just above 3 per cent in the last quarter of 2015.

The bank had originally expected Malaysia's GDP to grow by 4.5 per cent in December but revised its reading to reflect the gradual deceleration in private consumption as a result of softer labour markets, and cautious household spending triggered by a new tax and subsidy cuts.

Sharp decline in the ringgit could also worsen consumer sentiment, forcing adjustments that could slow the economy significantly.

“In an adverse scenario, a sharp adjustment among households due to steep decline in real income growth and or weakening of the ringgit could eventually have spillover effects on overall consumer confidence sentiments,” the report said.

But Putrajaya's fiscal consolidation remains on track despite a significant drop in oil revenue, and the World Bank expects Malaysia to meet its 3.1 per cent deficit-to-GDP target this year.

The report also noted that the government's move to maintain a competitive monetary policy and lending rates, flexible exchange rate to continue supporting growth.

Inflation is expected to hover around the 2.5 to 3.5 per cent mark throughout the year, the report said.

Prices of basic goods increased significantly after the Najib administration introduced the Goods and Services Tax in April 2015, alongside more subsidy cuts, which resulted in Putrajaya providing targeted financial assistance for the poor.

The World Bank noted in its report that such programmes would be more cost effective than measures to increase income, which could be more difficult to sustain in the long run.