UPDATE 1-Malaysia Q1 GDP grows 5.4 pct y/y, slows for second straight quarter

(Adds comment on 2018 growth)

KUALA LUMPUR, May 17 (Reuters) - Malaysia's annual economic growth slowed to 5.4 percent in the first quarter of 2018, leaving the country's new government with the task of turning around an economy that has decelerated for two consecutive quarters.

Releasing the latest gross domestic product data on Thursday, the central bank said domestic demand would help growth stay favourable, though the January-March performance was below a median forecast of 5.5 percent given by a Reuters survey of economists.

Growth has decelerated from 5.9 percent in the fourth quarter of 2017 from 6.2 percent in the third quarter, its strongest showing in three years.

The slowdown comes amid uncertainty over economic policies of the new administration led by Mahathir Mohamad, who led an opposition alliance to a surprise win over his scandal tainted former protege Najib Razak and a Barisan Nasional coalition that had led the country for six decades.

Bank Negara Malaysia said first quarter growth was propped up by expanding private sector activity and strong support from exports.

"Growth is expected to remain favourable in 2018, with domestic demand continuing to be the key driver of growth," the central bank said in a statement. "Growth prospects are further supported by continued positive spillovers from the external sector to domestic economic activity."

Malaysia's 2017 full year growth of 5.9 percent was its best in three years, and well up from the previous year's 4.2 percent.

Headline inflation was projected to average 2-3 percent in 2018, it said, following 1.8 percent in the first quarter. (Reporting by Joseph Sipalan; Editing by Simon Cameron-Moore)