UPDATE 2-Malaysia seen on road to recovery as economic slump eases

* Malaysia Q1 GDP -0.5% y/y vs -3.4% in Q4

* Full-year GDP remains within projected 6%-7.5% - gov

* Says recovery will be gradual and uneven across economic sectors

* Fresh lockdown will weigh on consumption - Capital Economics (Writes through, adds economist comments, details)

KUALA LUMPUR, May 11 (Reuters) - Malaysia’s central bank sees the economy firmly on the path to recovery, as it recorded improvements in domestic spending and exports even amid a spike in coronavirus cases.

First quarter gross domestic product shrank 0.5% from a year earlier, central bank data showed on Tuesday, better than the 2% contraction forecast in a Reuters poll and the 3.4% fall over October-December.

Bank Negara Malaysia (BNM) said the economic recovery will benefit from better global demand, increased public and private sector spending and continued policy support in the months ahead.

“We expect GDP growth to remain within the projected 6%-7.5% this year,” BNM Governor Nor Shamsiah Mohd Yunus told a virtual news conference.

Exports jumped 18.2% in the first quarter driven by demand for semiconductor shipments for work-from-home products and medical devices, the data showed.

Strong external demand provided a boost for the manufacturing sector, which grew 6.6% from a year earlier.

The government’s decision to allow major economic sectors to continue operating during a limited lockdown in the first quarter was a key factor behind Malaysia’s better-than-expected performance over the period, said Alex Holmes, Asia economist with Capital Economics.

“That said, the outlook has deteriorated again recently, with a rebound in cases leading to the reimposition of restrictions. As such, private consumption is likely to remain in the doldrums this quarter,” Holmes said in a note.

The contraction in private consumption eased to 1.5% from a 3.5% fall the previous quarter, while government spending was up 5.9%. Consumption accounts for more than 70% of Malaysia’s GDP.

The government declared a month-long nationwide lockdown on Monday amid a fresh spike in cases that health authorities have said could be related to new, more infectious coronavirus variants.

Malaysia’s economy fell 5.6% in 2020, its worst annual performance since the Asian financial crisis, due to strict coronavirus curbs over most of the year.


BNM said its monetary policy will remain accommodative to support the recovery, but highlighted the need to manage price pressures and monitor any build-up of financial imbalances.

“We have sufficient monetary policy space to provide support...if necessary,” Nor Shamsiah said.

Last week, the central bank left its policy rate at a record low of 1.75%.

Headline inflation is expected to average 25%-4.0% this year, due to the cost-push factor of higher global oil prices, the central bank said.

The ringgit lost 3.5% against the dollar in the first quarter as other major and emerging market currencies broadly fell to a strengthening greenback, the central bank said.

BNM expects Malaysia’s national vaccination programme will help lift sentiment and bolster economic recovery, along with gradual improvements to the labour market, global demand and private and public sector spending.

“The path of recovery will be gradual and uneven across economic sectors. It may also be we will encounter speed bumps along the way. However...our assessment is for the economy to continue to recover in 2021.”

Moody’s Analytics expects conditions will likely remain weak in the coming quarters, citing risks from a slow vaccination rate. “As a domestic driven economy, strength in the external sector is insufficient for the economy to rebound completely from its pandemic lows.” (Reporting by Joseph Sipalan; additional reporting by Rozanna Latiff; Editing by Jacqueline Wong)