New government policy shift suppressed both growth and inflation

Malaysia’s economy expanded by 4.7% in 2018, but the slowdown in growth from 5.9% in 2017 was the result of domestic and external drags. Domestically, there was an overhaul of economic policy after a surprise change of government in May 2018. And soon after taking office, the new government scrapped the goods and services tax - the key revenue source for the previous government and also suspended infrastructure investments.

While such a policy shift was positive for the economy to an extent, (via a boost in private consumption), it hit investment spending hard. Overall domestic demand shaved off 2.4 percentage points from annual growth in 2018 and was dragged down further by inventory de-stocking among other things.

Despite these headwinds, 14% annual export growth was outstanding performance among Asian economies

Externally, firmer commodity prices supported exports in early 2018, but export prospects deteriorated with increased US-China trade tensions and the renewed oil price slump in the second half of the year. The silver lining in all of this was electronics exports managed to ride out the 'tech slump' observed elsewhere. Despite these headwinds, 14% annual export growth was outstanding performance among Asian economies.

The removal of the goods and services tax in June 2018 was a godsend for consumers as it brought inflation below 1%. The re-introduction of a more benign sales and services tax didn’t do much to lift prices either. The average annual inflation of 1% last year was a sharp dip from nearly a decade-high of 3.8% in 2017.