KUALA LUMPUR: The Malaysian economy grew 4% in the second quarter of 2016 (Q2), driven by domestic demand, which registered growth of 5.7% during the quarter compared with 3.3% in Q1. The 4% year-on-year gross domestic product (GDP) growth brings the total growth for the first half of 2016 (H1) to 4.1%. GDP growth in Q1 was 4.2%. Bank Negara Malaysia (BNM) governor Datuk Muhammad Ibrahim said domestic demand was stronger during the quarter due to higher contribution from private consumption and private investment, which contributed 3.3 percentage points and 1.1 percentage points to GDP growth respectively. "However, growth was set back by the continued decline in net exports and a drawdown in stocks," he told reporters at a briefing on the economic performance last Friday. Import growth in Q2 exceeded exports following stronger investment activity while the drawdown in stocks was due to lower production of palm oil and manufactured products. Private sector activity remained the key driver of growth, expanding 6.1% in Q2 compared with 4.5% in Q1. Private consumption in Q2 grew 6.3% driven by continued wage and employment growth, and additional disposable income from government measures. Private investment grew 5.6% in Q2 driven by continued capital spending in the services and manufacturing sectors. Public consumption grew 6.5% in Q2 compared with 3.8% in Q1 while public investment turned positive, registering 7.5% growth in Q2 compared with a 4.5% contraction in Q1. Net exports of goods and services declined 7% as real imports grew faster than exports. On the supply side, growth continued to be driven by key economic sectors, all of which reported growth except for the agriculture sector, which contracted 7.9% in Q2 and 6% in H1 due to the lagged impact of El Nino on crude palm oil production. The current account surplus narrowed to RM1.9 billion in Q2, equivalent to 0.6% of gross national income, due to lower trade surplus (RM17.9 billion), higher investment income received by foreign investors in Malaysia and continued outward remittances by foreign workers in Malaysia. "For this year, we are quite confident that the current account will remain in the positive territory although it will be narrower. For 2017, it will very much depend on global growth, whether that will impact our export and the intensity of our imports," said Muhammad. Net foreign direct investment (FDI) inflows stood at RM8.8 billion in Q2 compared with RM15 billion in Q1. The bulk of the FDIs were channelled into the manufacturing and services sector, particularly the electrical and electronic and petrochemical segments. Despite uncertainties in the global environment, BNM maintained its 4-4.5% growth forecast for 2016, which will be driven by domestic demand. It also maintained its 3.1% fiscal deficit position forecast for 2016. AllianceDBS Research said the government's commitment to the fiscal position limits the upside in public expenditure contribution to GDP growth and expects targeted fiscal policies to stimulate private consumption to be announced in Budget 2017. “If the fiscal position allows, the government could even consider lowering the Goods and Services Tax (GST) rate from current 6%for a period of time as a short-term measure to spur household expenditure,” it said in its report. However, it noted that the reduction in GST rate would be dependent on the projection of global crude oil price sustainability in the coming years, in order to make up for the forgone revenue from GST. OCBC Bank expects GDP growth to average 4.1% in H2 and full-year 2016 GDP growth of 4.1%. It revised its 2016 growth forecast from 4.3% to 4.1% due to the weak underlying momentum while MIDF Research maintained its 2016 growth forecast at 4% with a 4.1% growth projection in Q3.