The relatively strong growth which beats analysts’ expectations of 8.4 per cent came as the world continues to grapple with economic uncertainties arising from the European fiscal crisis.
Domestic demand expanded by nine per cent, buoyed by private and public sector consumption which was up 7.9 and 6.9 per cent respectively.
Net foreign direct investment (FDI), however, fell to RM1.8 billion from RM6.8 billion last year.
BNM governor Tan Sri Dr Zeti Akhtar Aziz said strong domestic demand was important to sustain growth in the Malaysian economy, which has seen decline in exports since the beginning of the year.
“We are no longer just export-led. Domestic demand has a more important role in our economy,” she said.
Analysts said that although growth is expected to moderate further, Malaysia will still finish with strong GDP growth numbers for the year.
RAM Ratings chief economist Yeah Kim Leng said that if the country could maintain investor confidence the economy could “easily” keep growing at five to six per cent for the next six months and finish the year with above seven per cent GDP growth.
“We are halfway through the V shape recovery,” he told The Malaysian Insider. “When both domestic and external demand engines are firing, growth is strong.”
He noted, however, that the growth was coming off a low base after the Malaysian economy had shrunk 1.7 per cent last year due to the global financial crisis.
Standard Chartered economist Alvin Liew told Reuters that a potential easing of growth in China will also have a significant impact on Malaysia, as China is the top export destination for Malaysia after Singapore.
He added that he expects BNM to hold interest rates for the rest of 2010 after having raised it three times this year
“While Malaysia H1 GDP growth is very robust, the outlook for the second half is more uncertain, given the external developments including concerns of the sustainability of the global recovery in the coming months, unemployment remaining stubbornly high in G3 markets and lingering Europe sovereign debt concerns,” he said.
Zeti said increased domestic private consumption was supported by favourable labour market conditions, relatively low inflation and a steady increase in economic levels, while higher emoluments helped push public consumption.
Major economic sectors also registered strong growth, with manufacturing leading the way (15.9 per cent) thanks to a 29.9 per cent rise in external demand for electrical and electronic goods.
This was followed by services (7.3 per cent) which was supported by the wholesale and retail trade, finance and insurance, and transport and storage sub-sectors. The services sector, which has been tapped as a major growth driver under the New Economic Model, accounted for 4.2 per cent of GDP in the second quarter.
Construction (4.1 per cent) also saw good growth, with strong activity in the non-residential sub-sector offsetting a fall in the residential sub-sector.
Malaysia’s total external debt rose slightly to RM221.7 billion, or 30.5 per cent of gross national income (GNI), from RM219.3 billion the previous quarter following issuance of the RM1.2 billion 1 Malaysia Sukuk Global.
The Najib administration has set a goal of six per cent GDP growth annually over the next five years in order for the nation to achieve a gross national income per capita of about US$12,000 (RM38,400) by 2015 before rising to US$15,000 in 2020.
Zeti remained confident that strong growth will be sustained in the second half due to continued strong domestic demand and intra-regional trade and that Malaysia is on track to achieving the six per cent annual growth target set by the prime minister.
“Given the strong growth in the first half off the year, we believe that the growth for the year as a whole will exceed six per cent,” she said. “Therefore, we will see a reasonable rate of growth in the second half of the year despite the slowing of growth in the advanced economies.”
She added that Malaysia’s external sector will benefit from the sustained growth of Asian and other emerging economies.
She added that the interest rate in place now was “consistent and appropriate” to the outlook for growth and inflation, and said that any decision to normalise them will not be based on short-term results.
“Our monetary policy is forward-looking and therefore, it is based on current conditions but based on the outlook,” she said.
Asian countries that have reported second quarter GDP numbers so far include Hong Kong at 4.5 per cent growth, Singapore at 18.8 per cent.
