Posted on 21 Mar 2015
The Goods and Services Tax (GST) will rein in private consumption this year, slowing real gross domestic product (GDP) growth to 4.5% but also lower the overnight policy rate (OPR) to boost demand in 2016, said Macquarie Research.
"In 2015, we expect the GST to cause a deceleration in private consumption spending, especially in the first two quarters after its introduction.
Consequently, we forecast real GDP growth of 4.5% in 2015, with the deceleration (to just over 4% year-on-year growth) in 2Q and 3Q 2015 after 5.3% year-on-year growth in 1Q 2015," said its Asean economist PK Basu in a research note.
However, the slowdown in economic activity, larger current account surplus and tame inflation will enable the central bank to cut the OPR by mid-2015 to 3% which, combined with the highly competitive ringgit, will enable an export-led recovery to 6.1% real GDP growth in 2016.
Headline inflation is expected to rise after the introduction of GST on April 1, to 2.5% year-on-year in 2Q 2015 and marginally higher in the next two quarters but for the whole year, Basu expects headline CPI inflation of 2.3% year-on-year.
Basu said headline CPI inflation is likely to stay tame through most of 2015 because the Brent crude price will be lower year-on-year through the next half year.
"Malaysia's CPI inflation is correlated to Brent crude prices – and this will apply with even greater force now that Malaysia has rationalised fuel subsidies further, and moved to a 'managed float' pricing mechanism for RON95 petrol. Even if Brent prices rise toward US$70/bbl in the next half year, they will still be considerably lower year-on-year for the whole period – and their dampening effect on headline inflation will persist," he added.
According to him, there has been a great deal of confusion about the impact of GST because of the long list of exemptions.
"Over 700 specific products are exempted from the GST, and some existing goods and services are already subject to a sales and services tax (SST) – some (including cars) with SST rates that are higher than 6% (10% for cars).
"What is clear, however, is that the GST has a much wider remit than the SST, and is a comprehensive value-added tax system that will be applied across the supply chain to any company or enterprise with annual turnover of more than RM500,000," he said.
Basu said GST is an integral aspect of the fiscal rationalisation programme and despite the exemptions, the GST will widen the tax base and boost government revenue.
The GST is estimated to bring in RM23 billion of revenue annually, considerably more than the RM15 billion revenue from the SST.
