Malaysia: Country Economic Forecast: 22 Feb 2012

The economy maintained solid momentum in Q4, growing by 5.2% on the year thanks to strong domestic demand. Private consumption rose 7.1% on the year in Q4, the seventh straight quarter in excess of 6% while annual growth in investment picked up to 8.5%, a four-quarter high. 2011 marked the start of a new five-year plan and government spending accelerated strongly, rising by 22.8% on the year in H2. The government has indicated that this fiscal boost will continue, unsurprisingly as a general election is likely to be called this year. The 2012 budget included a number of measures helping potential voters. We expect the central bank to leave interest rates on hold in H1 2012, but downside risks to growth are high and raise the possibility of rate cuts. Consumer prices eased to 3.0% in December but inflationary risks remain. Although exports held up better than had been expected in Q4, this was largely due to strong shipments of natural gas and palm oil. With Malaysia very dependent on global demand, we expect the subdued world outlook to be a drag on growth this year. The government expects GDP growth of 5-6% in 2012, supported by strong domestic demand and fiscal stimulus. But the downside risks have increased in recent months so we are slightly more cautious, expecting growth of 4.8% in 2012 followed by 5.1% in 2013.