KUALA LUMPUR (NewsRise) -- Malaysia's economy grew 4.5% from a year earlier in the three months ended December 31 driven mostly by services and manufacturing output, but the pace decelerated from the previous quarter as investments slowed while commodity exports weakened, official data Thursday showed.
The economic output reading beat market expectation of a 4.1% growth but lagged July-September's 4.7% pace.
The better-than-expected print helped in part to boost investor sentiment. The nation's benchmark FTSE Bursa Malaysia KLCI ended 0.94% higher at 1,680.02 points, its highest closing since December 31.
The ringgit rose 1.25% to 4.16 against the U.S. dollar, almost wiping out this week's losses. The currency has outperformed its Asian peers in 2016, advancing 3%.
For the entire 2015, the Southeast Asia's third largest economy expanded 5.0%, slowing from a 6.0% growth a year earlier.
While private consumption and gross exports picked up pace during the final quarter, Bank Negara Malaysia flagged downside risks to the economy amid sluggish external growth, and rising cost of living that is squeezing purchasing power of the consumers back home.
"Growth will continue to be driven by domestic demand, with some support from net exports," the central bank said in a statement. "Nevertheless, the pace of domestic demand expansion is projected to moderate."
Despite better-than-expected data, economists say growth at Malaysia's trade-reliant economy could slow further this year amid persistent low oil prices and feeble global demand.
"We are far from upbeat about the prospects for Malaysia this year," said Capital Economics analyst Krystal Tan. "The effects of low commodity prices will continue to feed through the economy, curtailing investment in the energy sector, keeping commodity export income weak and hurting fiscal revenue."
She expects Malaysia's GDP to grow 4.0% this year, the bottom-end of government's forecast of growth between 4.0% and 4.5%, before edging higher to 4.5% in 2017.
Malaysia, Southeast Asia's biggest oil and gas exporter, is also the world's second-largest producer of palm oil after Indonesia. During the fourth quarter, growth in the agriculture sector moderated reflecting lower palm oil output while a drop in production of crude oil and natural gas weighed on its mining sector.
In the domestic market, a broad-based consumption tax that was imposed in April last year have pushed up prices of goods and services across the economy, hurting consumer and business spending. The government projects inflation to rise between 2.5% and 3.5% this year compared with 2.1% in 2015.
"While the growth in income and employment continues to support private consumption, it is expected to moderate as households continue to adjust to the higher cost of living," Bank Negara Malaysia said.
Meanwhile, private investment is projected to moderate to "below its long term trend" but currently remains supported by capital expenditure in the manufacturing and services sectors, the central bank said. Implementation of infrastructure projects will also help sustain spending.
"The downside risks to growth will however remain, given the continued uncertainty in the external environment and the on-going reforms in the domestic economy," the central bank added.
Still, the government' recently announced measures such as tax relief for middle-income households and reduction in employee provident fund contribution rates should aid an economic recovery in the second half of this year after a lacklustre performance in the first six months, UOB KayHian said in an investor note.
"Should the growth outlook turn further south, then additional monetary support via OPR (overnight policy rate) or SRR (statutory reserve requirement) cuts may be necessary," it added.
The central bank held key interest rate steady at 3.25% during its January meeting, drawing comfort from resilient economic growth and benign inflationary pressure. The benchmark overnight policy rate has remained unchanged since it was raised by 0.25 percentage points in July 2014.
"The balance of risks in 2016 is skewed towards growth disappointment and fiscal slippage, with inflationary pressures of secondary concern," Australia and New Zealand Banking Group said in a note.