Malaysia's economy probably grew at its slowest pace in the third quarter as exports fell, but resilient domestic demand, partly fuelled by government spending ahead of an election next year, helped shore up expansion, according to a Reuters poll.

Exports account for roughly 60 percent of Malaysia's gross domestic product, and these have been hurt by weaker demand for commodities and electronic components in China as well as the European Union.

Third quarter gross domestic product likely rose 4.8 percent from a year ago, slowing from the previous quarter's 5.4 percent pace of expansion and 4.9 percent growth in the first quarter, according to the median forecast. The forecasts provided by 21 economists ranged from 3.5 to 5.5 percent.

"The drag on growth has come from the external sector, where the trade balance has narrowed, with exports stagnating and imports of capital and consumer goods rising amid sustained domestic demand," said Daniel Wilson, an economist with ANZ in Singapore.

The country's exports fell 2 percent year-on-year in the third quarter, compared to a 4 percent annual rise in the second quarter. On a monthly basis, a gain in September exports on the back of firmer electronics demand helped cushion the slide after contractions in both July and August.

Industrial production also rebounded in September, after shrinking for the first time in 13 months in August, in line with data from elsewhere in the region suggesting that the global trade slowdown was easing.

Manufactured goods make up about two thirds of the exports of Southeast Asia's third largest economy.

Malaysia's central bank left interest rates steady for a ninth consecutive time last week, pinning hopes on domestic demand to drive growth and offset the weakness on the external front.

Loan growth, higher gov't spending

Economists said robust consumption and investment spurred domestic activities, underlined by strong growth in business and household loans as well as a pickup in automobile production and sales.

Motor vehicle sales in the third quarter rose 3 percent year-on-year or up 2 percent for the nine months to September.

Business loans grew 13.5 pct in September while household loans were up almost 12 percent higher.

The consumer sentiment index published by the Malaysian Institute of Economic Research was positive for the third quarter.

"Growth was likely supported by strong domestic demand. Consumer and fiscal spending probably stayed strong on the back of government handouts, stable employment conditions and income

growth," said Chua Hak Bin, a Singapore-based economist with Bank of America Merrill Lynch.

Some of the growth has been driven by infrastructure projects such as a new mass transit system for Kuala Lumpur and the Iskandar economic zone, just over the border from Singapore and three times the size of the city-state.

Government spending and handouts ahead of a national election that must be called by next April has also boosted incomes, economists said.

These measures include bonus payments to civil servants and cash handouts to low income households and students. The implementation of a minimum wage level in October is also expected to support consumption.

"We expect more fiscal support to growth in the coming months, which should again partly offset weakness in exports," said Nomura economist Euben Paracuelles in a recent research note.

Full year GDP growth is expected to be 4.8 percent, according to a Reuters quarterly poll last month, within the government's target of 4.5-5.0 percent.

- Reuters