BNM expects strong 5.5%-6% GDP growth in 2018, inflation seen lower at 2%-3%

KUALA LUMPUR: The Malaysian economy is expected to expand 5.5% to 6% this year after a strong growth of 5.9% last year, according to Bank Negara Malaysia (BNM).
Speaking at a press conference in conjunction with the release of BNM annual report 2017, Governor Tan Sri Muhammad Ibrahim said the growth will be mainly driven by domestic demand with high contribution from the services sector.
“We should also benefit from exports as the IMF sees 3.9% global growth. This will add to the sentiment that this year will be a good year provided there is no trade war, unforeseen volatility and surprises from the normalisation of monetary policy,” he added.
He said Malaysia is not spared in the event of the breakout of trade war between the US and China, but stressed that the local economy is more diversified in terms of trading partners and the product types sold.
“Trade protectionism will impact everyone as our economy is open and the world is more globalised.”
Malaysia’s gross exports and imports are projected to grow 8.4% and 8.6%. Overall, current account balance is expected to register a surplus of 2% to 3% of gross national income (GNI).
BNM noted that private sector expenditure will remain the key driver of growth, underpinned by continued growth in wages and employment, business optimism and favourable demand. Private consumption growth is projected to remain sustained at 7.2% in 2018.
However, public sector expenditure is expected to decline on the back of the contraction in public investment amid more moderate growth in public consumption.
Headline inflation is expected to moderate to between 2% and 3% in 2018 from 3.7% in 2017, mainly due to a smaller contribution from global energy and commodity prices. A stronger ringgit exchange rate will also mitigate import costs.
Inflationary pressure from domestic demand factors will be contained by improving labour productivity and ongoing investments for capacity expansion.
“If oil prices are stable, inflation will be stable as well. It is quite certain that inflation will be around that range this year,” said Muhammad.
On the monetary policy, BNM said the Monetary Policy Committee will monitor closely the economic outlook, including the impact of the Overnight Policy Rate hike of 25 basis points to 3.25%.
Given the robust growth environment, the central bank believes the fiscal deficit could narrow further to 2.8% of GDP in 2018 from 3% in 2017.
The country’s external debt declined to RM883.4 billion as at end-2017, equivalent to 65.3% of GDP, attributable to valuation effects due to the strengthening of the ringgit against most currencies.
Meanwhile, Muhammad highlighted that labour market reforms are necessary for a sustainable growth going forward.
This includes reducing reliance on foreign workers, creating high quality jobs and offering more competitive wages.
However, he noted that the labour market reforms need long-term policy so that businesses can reduce the dependence on foreign labour in stages.
In addition, Muhammad said Malaysia needs more quality investments by encouraging deeper contributions to the economy and diversifying into knowledge-intensive products.
On embracing new growth areas such as e-commerce, sharing economy, industry 4.0 and artificial intelligence, he opined that it could be achieved through accelerating the pace of digitalisation and advancing economic complexity.