This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.

The headline GDP growth number that Bank Negara Malaysia announced for the third quarter would not have come as a surprise to anyone who has been tracking domestic economic affairs.

At 4.7%, 3Q2015 represented the fourth consecutive quarter of deceleration in Malaysia’s gross domestic product (GDP) growth. Despite that, the central bank believes Malaysia is an expanding economy, holding up well against external headwinds that are beyond its control. Economists concur, taking the view that the third-quarter figure is not alarming but predictable.

“GDP growth of 4.7% is within our expectations. When you think about what we are going through — soft commodity prices, a depreciating ringgit, global economic uncertainties — the 3Q2015 number is not bad at all,” says M&A Securities head of research Rosnani Rasul.

Still, Bank Negara’s report shows a number of niggling signs that the country should be concerned about. The most glaring of all is the rapid fall in aggregate domestic demand growth to 4% from 2Q2015’s 4.6% and 1Q2015’s 7.9%. This is the lowest growth rate seen since 4Q2009 when Malaysia was reeling from the effects of the 2008/09 global financial crisis (GFC) that originated in the US.

A major contributor to the drop was a slowdown in private-sector consumption, which fell to just 4.1%, the lowest since 2Q2010. It was down 2.3% quarter on quarter and half of 6.8% year on year. Private investment, though, recovered to 5.5% from 2Q2015’s 3.9% to cushion the fall in consumption.

The implementation of the Goods and Services Tax (GST) on April 1 predictably took the wind out of spending. For almost every ringgit spent in Malaysia, 6% is taken out of the economy and goes straight to the government’s coffers. Consumers are stretched and spending less on non-essential goods that are subjected to GST.

Many market observers had expected the adverse effects of the consumption tax to taper off towards the end of 3Q2015 but there has been no sign of that so far.

Then, there is the strain on disposable income caused by the weakening ringgit. Imported goods, from simple items like apples, oranges and chocolates to little luxuries like electronics and branded cellphones, now cost much more. This is despite a moderating Consumer Price Index (CPI), a measure of prices paid by urban consumers for a basket of goods and services. In September, CPI fell 0.3% to 113.6 points month on month and stagnated in July and August.

“CPI is a headline number that economists look at. The question is still whether consumers feel that prices are coming down and thus be willing to spend. The answer is no because you now have to budget more to pay taxes on what you consume, you pay more for transport and imported goods,” says independent economist Lee Heng Guie.

In a Nov 16 note, MIDF Research comments that the moderation in consumption was also attributable to low income growth among Malaysians in 3Q2015, possibly caused by the lower profits earned by companies for the first nine months of the year. It expects slowing domestic demand to persist until the first quarter of next year.

Set against a backdrop of growing household debt, albeit one that moderated to 7.6% in 3Q2015, this has not been an ideal year for free-spending, even for the well-to-do households.

That a new consumption tax and a weaker currency would stall consumer spending is unavoidable. But for these factors to have the same dire impact as the GFC is unexpected. Lee says, “I think consumption has fallen more severely than expected. I am not sure if the adjustment to GST and higher import costs can be to such an extent.”

So, how big a reversal in current private consumption patterns can Malaysia expect to see once households adjust fully to GST?

One element that has come into play this time around is the intangible influence of weak consumer confidence. The Malaysian Institute of Economic Research says its Consumer Sentiments Index was at an all-time low of

70.2 points in 3Q2015, falling from 71.7 points in 2Q2015. This is again reminiscent of the GFC era; the last time the CSI sank this low was in 4Q2008.

That, in part, had to do with negative newsflow on the domestic economy and the job market. Consumer feelings, it appears, are at odds with official numbers. Bank Negara data shows that all sectors of the Malaysian economy are still expanding and that the domestic job market remains stable despite unemployment edging up to 3.2% in 3Q2015 from 3.1% in 2Q2015 while labour participation was sustained at 67.6%.

“You have news that the economy will see slower growth, that the government is targeting slower growth and that unemployment is going up, especially in selected sectors. When people hear that, they tend to refrain from spending,” remarks M&A Securities’ Rosnani. “It is not a problem that is unique to Malaysia but it is happening now and the hope is that this sentiment is short term.”

The concern for Malaysia is that the downslide in consumption is not temporary and there are no policies to vigorously reverse the trend. The 2016 budget unveiled by Prime Minister Datuk Seri Najib Razak last month lends limited support to drive consumption. This is particularly evident in his income tax policies.

The lowest income earners or the B40 will receive increased direct handouts under the 1Malaysia People’s Aid (BR1M) and the minimum wage has been revised upwards but economists argue that such financial assistance will do little to cushion the fall in consumption in the group.

Najib announced some tax relief for middle-income earners who have unemployed spouses, children in institutions of higher learning and ailing parents that will be introduced in 2016 but the much-anticipated income tax reduction did not materialise.

Middle-income earners or the M40 earn between RM3,860 and RM8,320 per month.

“The M40 are the backbone of the economy. They spend the most and if they do not get the support they need, you won’t see consumption tick upwards,” warns Rosnani.

The wealthy and typically the group with the most disposable income will be taxed more. Those with taxable income of between RM600,000 and RM1 million will see a 1% increase in income tax to 26% while those making more than RM1 million a year will pay 28%.

Is there good reason to worry that Malaysians will tighten the purse strings and drive national consumption numbers down?

Malaysia’s economy is driven by consumer spending. Last year, domestic demand accounted for the lion’s share of Malaysia’s GDP, at 91.5%, of which private-sector consumption accounted for 51.8%. Net exports stood at only 9.3% of the country’s GDP last year. To that end, decelerating consumer spending foreshadows slower economic growth.

To drive the economy, consumers must be on a sound financial footing. So far, 2015 has shaped out to be an unkind year to consumers’ wallets. Unfortunately, there are no signs that the tide will turn any time soon.

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