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Trade war

Malaysia's economy slows as US-China trade war hits exports

GDP expanded 4.5% in first quarter, while growing tensions darken outlook

Malaysian Prime Minister Mahathir Mohamad, left, meets Chinese President Xi Jinping in Beijing in April. Malaysia last month revived the 640 km East Coast Rail Link deal with China, a multibillion dollar project that will help contribute to investment growth.   © Reuters

SINGAPORE -- Malaysia's economy slowed in the first quarter of 2019, as ongoing U.S.-China trade tensions took their toll on the country's exports.

The 4.5% expansion in gross domestic product announced on Thursday narrowly beat economist expectations, but was slower than the 4.7% in the previous three-month period. The escalating trade tensions between the world's two largest economies is expected to weigh on the Southeast Asian country's economic outlook.

Malaysia's economic growth is "likely to continue slowing in the coming quarters," said Alex Holmes, Asia economist at Capital Economics in Singapore, adding that the boost to consumption from last June's abolition of the goods and services tax will fade.

"The recent escalation in the U.S.-China trade war will be another headwind," Holmes said. "We are forecasting a further slowdown in global growth, which will weigh on demand for Malaysia's exports."

The country's economy is heavily reliant on trade, with the U.S. and China combined accounting for more than 20% of total exports. On top of the slower trade stemming from the dispute, the recent global slump in smartphone demand has also affected electronics makers that have export bases in Malaysia.

Malaysia's net exports for the first quarter grew 10.9%, but that was tempered by a 1.4% decline in imports. Growth in exports was marginal at 0.1%, slower than 3.1% in the previous quarter.

Private sector consumption and investment grew 7.6% and 0.4%, respectively, in the January-March quarter, Bank Negara Malaysia, the central bank, said on Thursday, in its announcement on GDP. In the public sector, consumption grew 6.3%, while investment declined 13.2%. In terms of sectors, services grew 6.4% and manufacturing expanded 4.2%, while mining declined 2.1%.

"Private sector activity remained the key driver of growth, supported mainly by firm private consumption growth during the quarter," the bank said in a statement, adding that private demand is expected to remain the anchor of growth in the coming months.

The external sector is "likely to grow marginally in tandem with modest global demand," the bank noted.

Malaysia's growth rate hit a recent peak of 6.2% in the July-September quarter of 2017, but after that its pace slowed due to the new government's review of big projects as well as global trade uncertainties, until it marked an increase in the October-December 2018 period.

The central bank earlier this month lowered its policy rate for the first time in nearly three years, to 3% from 3.25%, citing "slowing global demand conditions" and "subdued growth of key trading partners."

Key drivers now for Malaysia's economy are domestic factors -- consumption and investment. Prime Minister Mahathir Mohamad's government last month revived the 640 km East Coast Rail Link deal with China, a 44 billion ringgit ($10.5 billion) project that will help contribute to investment growth.

In addition to monetary easing and the resumption of major infrastructure projects, it will be crucial for the Mahathir government to continue fiscal reform and digitalization of industries in order to buoy the slowing economy, as those measures will help boost investment activity.

Still, consumption could also face headwinds, a recent survey shows. The country's consumer sentiment index dropped for the third consecutive quarter in the January-March period, according to the Malaysian Institute of Economic Research. "This could possibly suggest some weakening in private consumption growth in the coming months," Singapore's DBS Bank noted in a recent report.

Southeast Asia's major economies similarly faced slower growth in the January-March quarter, with Singapore's GDP hitting a decade low growth rate of 1.3% in a preliminary data report, Indonesia reporting 5.07% and the Philippines 5.6% -- all expansions that slowed from the countries' growth in the previous quarter. Thailand is scheduled to announce its first quarter GDP next Tuesday.

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