The Washington DC-based international financial institution said in the twice-yearly East Asia and Pacific economic update that the country’s gross domestic product (GDP) growth this year might come in at 4.3% or 0.8 percentage points lower than the April estimate.
However, it expects an improvement in Malaysia’s growth in the second half of the year on an anticipated bottoming-out of external demand and an increase in confidence in the recovery of advanced economies.
Malaysia’s GDP growth slowed in the first half of 2013 largely on account of weak external demand.
The World Bank said the impact of further fiscal consolidation and possibly tighter credit conditions on domestic demand would weigh on the growth outlook in 2014 and 2015.
“Domestic demand will start facing headwinds from fiscal consolidation earlier and more extensively than previously anticipated, although investment growth should retain some momentum given the extended implementation period of many ongoing projects,” it said.
It added that the improved external environment would partly mitigate those headwinds.
“While consumption growth is expected to pick up modestly in 2015 as the effects of fiscal consolidation start to wear out, growth in capital formation is expected to slow further, while still remaining at elevated levels compared to pre-2008 levels.
“An acceleration of Malaysia’s structural reform agenda could present upside risks to the 2015 forecasts.”
It expects fiscal policy to remain on track for consolidation through 2015, with the goal of reaching a deficit of 3% of GDP.
“This will require that the government adopt a medium-term perspective to fiscal policy and a commitment to controlling emoluments and supplies and services as well as continued efforts to raise non-oil tax revenues.
“Under current baseline assumptions, the deficit is expected to narrow from 4.1% in 2013 to 3.6% in 2014 and 3.3% in 2015. On the external side, the current account surplus is expected to narrow to 3.4% of GDP in 2013.”
“GDP expanded 4.2% in the first six months compared to 5.9% in the previous six months (2.5% compared to 6% on a sequential or seasonally adjusted annual rate basis).
“On the demand side, the weakness can be attributed primarily to exports, whereas domestic demand remained robust, with the value added produced and absorbed domestically expanding by a faster rate in the first half of 2013 compared to the previous six months (9.3% compared to 8.8%).”