KUALA LUMPUR: While growth in the Malaysian economy may have bottomed out last year, this year will see a modest recovery recording a 4.4 per cent growth followed by a 4.6 per cent growth in 2018 said the Asian Development Bank (ADB).
Firmer growth in major industrial economies and a mild recovery in domestic investment are likely to raise the level of economic activities.
Growth recovery will be well below the 5.3 per average rate the country achieved from 2011 to 2015, the Manila-based bank said in its 2017 outlook.
It will be accompanied by higher inflation at 3.3 per cent and a smaller current account surplus.
Sustaining growth as income rises will require higher productivity, which can be achieved through a major effort to strengthen innovation, it added.
A diversified economic base and a flexible exchange rate have helped to cushion the economy from the slump in global oil and commodity markets over the past two years.
Last year, growth was weighed down by decelerating fixed investment, weaker government spending, and a fall in net exports of goods and services.
As growth slowed, the unemployment rate edged up to 3.5 per cent in the fourth quarter of 2016 from 3.2 per cent a year earlier.
Annual growth in private consumption, made the largest demand-side contribution to GDP growth last year through support for household spending from increases in public sector salaries, a higher minimum wage, and government cash transfers.
ADB said the outlook for private fixed investment is improving somewhat with higher prices for hydrocarbons, recovery in agriculture, and better prospects for semiconductors.
"However, concern over possible global trade disruption and the impact of the normalisation of US monetary policy on capital flows to developing countries is likely to restrain recovery in investment." A pipeline of large infrastructure projects—such as the Pan Borneo Highway, the Pengerang refinery and petrochemical plant, mass rapid transport projects in Kuala Lumpur, and the East Coast rail link and high-speed rail line to Singapore— should stimulate both public and private investment.
"As for net external demand, its drag on GDP growth is forecast to diminish this year unless global trade is seriously disrupted."
Private consumption is expected to grow this year at around last year's pace.
"Rising wages are seen to underpin household spending, as are government measures to bolster incomes, including tax breaks, higher cash transfers to lower-income groups, and a reduction in mandatory employee contributions to the national retirement fund."
By sector, growth in services will benefit from rising inbound tourism aided by the depreciation of the ringgit.
In the report, it said growth in Southeast Asia is forecast at 4.8 per cent in 2017 and 5.0 per cent in 2017, with Malaysia and Vietnam recovering from slow growth in agricultural output and, in particular, a surge in public and private investment.