This article first appeared in The Edge Financial Daily on September 21, 2017

KUALA LUMPUR: RHB Research Institute Sdn Bhd expects annual gross domestic product (GDP) growth to quicken to 5.4% in 2018, from the 5.3% estimate for 2017, fuelled by a pick-up in domestic demand amid expectations of sustained growth in external activities.

In an economic update yesterday, the research company projected that domestic demand will edge higher to 6.4% year-on-year (y-o-y) in 2018, from 6.3% expected in 2017, compared with 2016's 4.3%.

“Domestic demand would likely take centre stage in fuelling growth, as the spillover effects from strong external demand become more broad-based. Private consumption is expected to be supported by employment gains and income, while the public sector should be supported by higher revenue and potential pre-election spending,” it said.

In tandem with relatively subdued fuel prices, the headline inflation rate may normalise next year, possibly easing to 2.7% y-o-y in 2018, from 3.5% expected in 2017, it said. This, along with stable income growth and improving labour market conditions, is said to help enhance consumer sentiment, and improve private consumption growth in 2018 to 6.3%, marginally higher than an estimated 6.2% growth this year.

Private investment is expected to slow slightly next year to 8.6% y-o-y, from an estimated expansion of 8.8% this year. On public expenditure, as the government is expected to ramp up spending, public consumption is likely to grow at a stronger pace of 5.5% next year, while public investment is envisaged to pick up to 3.8%. The estimated growth for public consumption is at 5.3% in 2017, and 3.4% for public investment.

The research company also expects Bank Negara Malaysia to hike its overnight policy rate by 25 basis points in 2018 to 3.25%, after maintaining rates at 3% until year end.It said the hike would be in line with the central bank’s moves to tighten monetary policies and projected improvements in Malaysian economic growth next year. It added that the ringgit is expected to strengthen further against the greenback next year, to trade at around RM4.15 per US dollar at end 2018 as capital flows improve further.

Meanwhile, it has projected that Malaysia’s exports will continue growing next year due to sustained global demand for commodities as well as electrical and electronics products, albeit at a moderate pace of 5.6% y-o-y as high-base effects kick in, compared with an expected 11.2% growth in 2017. Imports are expected to be outpaced by exports and will slow down to register a growth of 5.8% next year, from 18.6% estimated for this year, RHB Research added.

“The current account surplus in the balance of payments in 2018 is envisaged to widen to RM30.3 billion or 2.1% of GDP. This is from a surplus of RM24.7 billion or 1.9% of GDP estimated for 2017, due to a wider merchandise balance and smaller deficit in the transfers account,” it said.