According to ICAEW’s latest ‘Economic Insight: South-East Asia’ report, domestic demand will remain the key driver of growth supported by solid labour market conditions and investment.
Gross domestic product (GDP) growth is expected to reach 5.1% in 2018, a slight ease from 6% estimated in 2017, given moderating export growth and tighter credit conditions. Synchronised recovery in global growth will continue to be supportive of exports but momentum is likely to ease over 2018 as global trade recovery enters a more mature stage and Chinese import growth cools on the back of a tightening monetary policy.
Domestic demand will remain the key driver of growth for Malaysia in 2018, supported by solid labour market conditions and investments, mainly in infrastructure spending. Funded through domestic and foreign direct investment flows, key projects include the currently under-construction East-Coast rail link and the KL-Singapore High Speed Rail line, where work is slated to begin in 2018. The Malaysian government has also ear marked RM6.5 billion under Budget 2018 to develop rural infrastructure within the country.
Although Budget 2018 will provide ongoing support for consumer spending with personal income tax cuts for a number of income brackets and cash handouts to civil servants, retirees and the rural sector, spending is expected to moderate from the exceptional growth in 2017. Household debt servicing costs are likely to increase in line with the rise in domestic borrowing rates in view of an anticipated 25 basis point hike in the overnight policy rate (OPR) likely to be announced by Bank Negara Malaysia in the first quarter of 2018.
In spite of the positive economic growth outlook, inflation is expected to moderate in 2018. Core inflation will likely edge higher next year amid robust domestic demand, with headline inflation expected to moderate to 2.9% next year from an estimated 3.8%.
Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist said: “We expect the process of monetary policy normalisation by Bank Negara Malaysia to proceed in a gradual and well-communicated manner. A very gradual macro policy normalisation cycle, along with still relatively solid trends in global trade growth, is expected to ensure that growth remains reasonably resilient in Malaysia and across the region.”
Supported by an almost ubiquitous pick-up in global growth and world trade, South-East Asia saw firmer commodity prices and supportive domestic conditions resulting in a stellar year for the region. South-East Asia is on track to achieve 5% growth in 2017, which is a first for the region since 2014.
