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Malaysia grows 6.4% in second quarter, tops forecasts

Here's the downside to Malaysia Q2 GDP

Malaysia's economy expanded at a faster-than-expected pace in the second quarter, data showed on Friday, boosted by strong exports and robust consumption.

Gross domestic product (GDP) growth rose 6.4 percent from the year-ago period versus the 5.8 percent gain a poll by Reuters was expecting.

The ringgit extended gains on the news to hit a session high against the dollar. Malaysia stocks showed muted reaction, trading flat.

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"The very strong export performance was better than expected," Bank Negara Governor Zeti Akhtar Aziz told a news conference after the data release. "It's very likely that the overall growth for the year will exceed growth projections made earlier."

Zeti added that the central bank's efforts to curb consumer debt were working as intended, noting a recent "moderation" in household debt. "If we were to be overly stringent in our policies it will result in an over adjustment," she said.

To curb the ballooning debt, the central bank last month raised its interest rate for the first time in three years by 25 basis points to 3.25 percent. Economists believe it will have to do more to dissuade borrowers. The next central bank meeting takes place in September.

Tengku Bahar | AFP | Getty Images

Philip McNicholas, ASEAN economist at BNP Paribas, says the strong numbers belie concerns of runaway growth.

"The numbers were extremely strong but there were some worrying trends underneath those numbers, in particular the expansion seems to be driven primarily by exports in particular manufacturing and mining but both of them grew at [what's] looking to be unsustainable paces," he said.

"Manufacturing expanded at an annualized pace of 16 percent in the second quarter while mining [expanded] around 30 percent. There should be question marks about how this can be sustained through the third quarter. We are more likely to see in the recent data that these trends are tailing off," McNicholas added.

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While, manufacturing and mining are booming, the services sector is lagging, signaling a weak domestic economy.

"The services seems to grow at an annualized basis of 4 percent which is considerably below [what] the headline reading implies," said McNicholas. "On the whole, i'm still concerned about the economy [that isn't] doing as well as the headline number is suggesting"

Barclays, however, has a more upbeat outlook for the economy, expecting growth to remain robust in the second quarter and raised its full-year growth forecast to 5.9 percent from 5.7 percent.

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The strong numbers also add to the case for more tightening measures ahead, the bank noted.

"Today's strong growth print puts some pressure on BNM (Bank Negara Malaysia) to tighten monetary policy further, amid sticky inflationary pressures," Rahal Bajoria of Barclays wrote in a note.

"We maintain our view that BNM is likely to deliver another 25 basis-point rate hike by the end of the year, most likely in September," he added.

— Reuters contributed to this report.