Even as 1Q2012 GDP expanded at a respectable 4.7% pace, growth going forward will become more challenging. The main issue facing the Malaysian economy today is weakness in the external sector from a crisis-hit Europe as well as softening growth in the rest of the East Asian region. These have threatened export growth for Malaysia which has already been reflected in the weak trade performance in the first half of the year.

Peers in the region such as India, Korea, Singapore and Thailand have already posted disappointing growth numbers, and China’s slowing growth momentum is another cause for concern. Weaker global demand is also dampening commodity prices, which will affect local incomes dependent on agricultural and mining exports such as palm oil and crude oil.

Nevertheless, the economy is well-supported by robust domestic demand, particularly from private consumption and investment. The latter in particular is set to outperform this year from a slew of mega-projects related to the Economic Transformation Programme, such as the RM70 billion MRT and RM120 billion RAPID projects. There are also signs that global growth may have reached a bottom for this cycle, as there is evidence of higher demand for electronics and electrical products which still constitute a third of Malaysia’s exports. MARC expects the higher contribution from investment and sustained private consumption to help support economic growth in the region of 4.4% for the whole year despite the challenging external environment.

Inflation will be lower this year helped by lower imported commodity and food prices, and MARC is lowering its forecast from an average of 2.5% to 1.8% for this year. While this provides more room for monetary accommodation should it be required, BNM is unlikely to reduce interest rates over the near term unless growth comes in far worse than expected.

The federal government fiscal position is set to improve this year with the deficit target of 4.7% of GDP well within reach, on the back of a significant improvement in revenue collection in 1Q2012. The fiscal position could be further improved if the government adheres to its budget and utilises any higher revenue gains towards retiring debt instead of funding additional spending programs.

On the ringgit, MARC expects trade in the local currency to be volatile and subject to risk perceptions among foreign investors. Together with lower foreign interest in the domestic capital markets, that should see the ringgit trading between RM3.10-RM3.30 to the US dollar.

For a copy of MARC’s Second-Half Economic Outlook 2012, please click  here.