Malaysia: Economy slumps to over one-decade low in Q4 2019
The economy lost considerable traction in the final quarter of 2019. GDP grew 3.6% in annual terms in the fourth quarter, down from Q3’s 4.4% expansion and marking the worst performance since the global financial crisis in 2009. Moreover, the result notably missed market expectations of a softer slowdown to 4.2%. In quarter-on-quarter seasonally-adjusted terms, GDP growth decelerated to 0.6% in Q4 from 0.9% in Q3. All told, economic growth in 2019 cooled to 4.3% from 4.7% in 2018, which also represented the worst performance in 10 years.
Frail external demand, dented by the Chinese slowdown amid ongoing trade tensions with the U.S., led the further deceleration in the fourth quarter. Exports of goods and services fell 3.1% year-on-year (Q3: -1.4% yoy), largely due to declining shipments of electrical and electronic products, and liquefied natural gas. Conversely, the contraction in imports of goods and services moderated in Q4 (Q4: -2.3% yoy; Q3: -3.3% yoy). Consequently, net trade shaved 0.7 percentage points from growth in Q4, contrasting the 1.0-percentage-point contribution in Q3.
The domestic economy fared better in the final quarter of last year but remained weak by historical standards. Private consumption growth surged to 8.1% in Q4 from 7.0% in Q3, remaining the main driver of growth. Government outlays also gathered pace (Q4: +1.3% yoy; Q3: +1.0% yoy) but were subdued as the government maintains its fiscal consolidation agenda. Meanwhile, the downturn in fixed investment softened in Q4 after contracting at the fastest pace on record in Q3 (Q4: -0.7% yoy; Q3: -3.7% yoy), thanks to a recovery in construction activity and a weaker decline in machinery and equipment investment.
This year, the economy is likely to remain soft as prolonged weakness in export-oriented sectors spills over into the labor market, and thus constrains household spending. On the upside, exports are projected to recover slightly in 2020, while a rebound in fixed investment should buffer growth. That said, the recent coronavirus outbreak and its subsequent drag on the Chinese economy and disruption of global supply chains could exacerbate frail external demand. In addition, the outbreak will likely hinder tourism, while falling global crude oil prices could weigh on Malaysia’s commodity exports. To what extent and for how long the virus will weigh on activity in China is still largely unknown. The outlook will also partly hinge on ongoing U.S.-China trade negotiations: Further progress would be a tailwind for growth whereas a setback could prolong the export recovery.
Commenting on the outlook for the Malaysian economy, economists at Goldman Sachs noted:
“Going forward, we expect sequential growth to improve incrementally on a mix of favorable global and domestic financial conditions and a moderation in trade policy uncertainty, but risks are skewed to the downside including from potential negative spillovers from the COVID-19 outbreak to Q1 growth. While for now we expect Bank Negara Malaysia (BNM) to keep policy rates unchanged this year after the surprise rate cut in January, risks are increasingly tilted to the dovish direction.”