Malaysia’s Economy Grew Faster Than Estimated Last Quarter

Malaysia’s economy grew at the fastest pace in five quarters amid an export recovery, increasing scope for the central bank to raise interest rates and contain threats to financial stability.

Gross domestic product rose 6.2 percent in the three months through March 31 from a year earlier, after climbing 5.1 percent in the final quarter of 2013, the central bank said in a statement in Kuala Lumpur today. The median in a Bloomberg News survey of 22 economists was for a 5.7 percent increase.

A revival in global demand, led by more confident American households and businesses, is spurring orders for Malaysian goods while wage growth and capital spending in the Southeast Asian economy fuel consumption. Bank Negara Malaysia signaled this month it may need to adjust the degree of monetary policy accommodation to avoid a build-up in financial and economic imbalances, spurring bets it will raise borrowing costs.

“Strengthening exports, on the back of improving demand from advanced economies, should support overall growth and create scope for the BNM to tackle financial risks,” said Krystal Tan, a Singapore-based economist at Capital Economics Ltd. The “strong out turn has increased the odds of the BNM hiking its policy rate in July,” she said.

The ringgit has strengthened about 1 percent this month against the U.S. dollar. The FTSE Bursa Malaysia KLCI Index of shares rose 0.2 percent today. Malaysian interest-rate swaps are pricing in a 50 basis-point increase in borrowing costs in the next year, data compiled by Bloomberg show.

Policy Rate

GDP may rise 4.5 percent to 5.5 percent in 2014, the central bank said in March, widening the range from an earlier forecast of 5 percent to 5.5 percent. The economy grew 4.7 percent last year.

Growth in the first quarter was “exceptional,” and the expansion in subsequent periods is expected to be around 5 percent to 5.5 percent, central bank Governor Zeti Akhtar Aziz told reporters today.

The central bank held the overnight policy rate at 3 percent for an 18th straight meeting on May 8, even as it joined the Philippines in signaling a readiness to contain threats to financial stability.

“We want to be anticipatory and preemptive” rather than wait for imbalances such as the formation of asset bubbles, Zeti said today. “When these asset bubbles burst, the adjustment is far more painful” and would result in much higher costs to businesses and consumers, she said.

Inflation Drivers

Higher fuel prices and electricity tariffs have driven inflation in Southeast Asia’s third-biggest economy to the fastest in more than two years. Consumer prices rose 3.5 percent in March from a year earlier, matching the fastest pace since June 2011. The central bank forecasts price gains of 3 percent to 4 percent this year.

Domestic demand may be less of a driver of growth in 2014 compared with previous years, Tan of Capital Economics said.

“Public consumption spending is likely to be relatively subdued as the government pushes ahead with its drive to bring down its fiscal deficit,” she said. “The government is likely to reduce fuel subsidies again, which would in turn push up inflation and reduce households’ real purchasing power.”

Services rose 6.6 percent in the three months through March from a year earlier after climbing 6.4 percent in the fourth quarter, today’s report showed. Construction gained 18.9 percent last quarter, while manufacturing grew 6.8 percent.

Net exports climbed 14.9 percent in the first three months from a year earlier. Private consumption growth was 7.1 percent last quarter.

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