Malaysia growth slumps to 10-year low as US-China trade war bites

As virus outbreak adds more pressure to its economy, Malaysia’s central bank said it could cut interest rates again.

Coronavirus, Malaysia
The coronavirus outbreak is expected to further affect Malaysia's economic growth, the central bank said [File: Vincent Thian/The Associated Press]

Malaysia‘s central bank says there is “ample room” to adjust interest rates after economic growth slowed to its weakest in 10 years in the fourth quarter and the coronavirus outbreak threatened to pile on more pressure this year.

“We have ample room, inflation is still low,” Bank Negara Malaysia (BNM) Governor Nor Shamsiah Mohd Yunus told a news conference on Wednesday when asked about the possibility of a rate cut after the growth figures were released.

The central bank unexpectedly reduced its overnight policy rate last month by 25 basis points to 2.75 percent, the lowest since March 2011.

Southeast Asia’s third-largest economy grew by 3.6 percent between October and December from the same period a year earlier, due to lower output of palm oil, crude oil and natural gas, and a fall in exports due to the trade war between China and the United States.

The pace was the weakest since the global financial crisis, well below the 4.2 percent rise forecast by analysts in a Reuters poll, and slower than the 4.4 percent expansion in the third quarter.

Full-year growth came in at 4.3 percent, below the government’s forecast of 4.7 percent and the weakest since 2016.

The coronavirus epidemic in China will put further pressure on the economy this year, particularly in the first quarter, the central bank said after releasing the data. Malaysia counts China as one of its biggest trading partners.

The Malaysian government, which has forecast the economy to grow at 4.8 percent this year, is already working on a stimulus package for aviation, retailing and tourism to help cushion the effects.

“The economy is still being supported by very firm private sector spending, and that is a positive development in our economy. More importantly, private investment might turn around,” Nor Shamsiah said.

“But there are downside risks. It’s very difficult to predict how long it will take before [the virus] is contained … there are so many moving parts, but we do acknowledge it will impact us in the first quarter.”

Malaysia’s economy, like many in Asia, came under heavy pressure last year from the escalating US-China trade war and softening global demand, with the mining sector particularly hard hit.

While China and the US agreed on a preliminary deal last month, the fast-spreading epidemic has raised fresh global growth risks and heightened expectations of more stimulus in more vulnerable economies.

Capital Economics expects things to get worse in the first quarter as tourist arrivals plummet due to virus fears. Tourism accounts for 11.8 percent of Malaysia’s gross domestic product (GDP), according to BNM.

Potential disruptions to Malaysia’s manufacturing sector due to factory shutdowns in China and falling oil prices could also drag on growth.

“While there is clearly a great deal of uncertainty, we are pencilling in a slowdown in GDP growth to just 1.5 percent [year on year] in Q1 [the first quarter] – a much bigger hit to the economy than during SARS,” Alex Holmes, an Asia economist with Capital Economics, said in a note to clients referring to the 2002-2003 Severe Acute Respiratory Syndrome epidemic.

However, analysts say growth could snap back quickly if the virus is contained soon, much as it did after SARS.

Source: Reuters