Domestic demand driving more of Malaysian growth

Efforts by policymakers to expand the economy through consumption and and investment growth are gaining traction.

Domestic demand grew 9.6% yoy or roughly twice the rate of headline GDP, which rose at a slower rate of 4.7% in 1Q12, on the back of solid consumption (+7.4% yoy) and investment growth (+16.1% yoy).

But domestic demand is bound to taper off soon, according to RBS, as it gets dragged down due to increasingly souring exports. 

Here's more from RBS:

As has been the story for much of the region, the Malaysian economy expanded at a slower pace of 4.7% yoy (Q4 11: 5.2% yoy). And quite predictably, fading exports were the main headwind to overall growth. What was however, encouraging is that policymakers appear to be having a fair degree of success in re-orienting growth towards domestic demand. Going forward there will be some spill-over from weakening activity into incomes and domestic demand. Nonetheless, the deterioration should be limited by the favourable policy framework.

Domestic demand increased by 9.6% yoy (Q4 11: 10.4% yoy) or twice the rate of headline GDP. Underlying this were consumption and investment growth of 7.4% yoy and 16.1% yoy respectively. Consumption remained solid for three reasons: (1) high though moderating palm oil prices; (2) financial assistance programmes to lower income groups and (3) stability in services sector employment. The strength of investment is attributable to higher infrastructure spending by both public and private sector entities.

Going forward, we do believe domestic demand will moderate. As exports slow further (real export growth data in Q1 12 was not available), slowing income growth in the tradables sector will impact consumption and investment activity. Nonetheless, even if domestic demand growth comes off by 1%-2%, it would be possible to meet the full year official growth estimate of 4%-5%.

Against this backdrop, Bank Negara has indicated that the current monetary policy stance is appropriate. As such, the central bank has space to lower the policy rate by 1% to 2% (the lowest during the global financial crisis). However, it is likely to exercise this option only in an extreme scenario.