Malaysia's economy expanded at a much slower pace of 4.5 percent in the second quarter, hit by commodity production "shocks", leading Bank Negara to cut its full-year growth forecast for Southeast Asia's third-largest economy.

According to Reuters, the April-June rate was well below the 5.2 percent forecast in a Reuters poll, but the central bank remains cautiously optimistic about the second half of the year.

The quarter had the slowest growth since October-December 2016.

"Growth in the mining sector contracted due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather conditions," Bank Negara Malaysia said in a statement on Friday.

The bank brought down its 2018 full year growth projection to 5.0 percent from the earlier 5.5 - 6.0 percent range.

Friday's GDP announcement was governor Nor Shamsiah Mohd Yunus' first since taking over as governor in late June as part of a high-level management shakeup by Prime Minister Mahathir Mohamad, who led his political coalition to a shock general election victory in May.

"The second quarter of 2018 was an eventful quarter," she said at a news conference to announce the GDP figures.

"For some, it will be remembered for the 14th general election, the beginning of a one-off tax holiday and significant improvement in consumer and business sentiments," she said.

The worst over?

Since taking over, Mahathir has pushed to review major infrastructure projects launched by the past administration and cracked down on corruption. He also repealed an unpopular goods and services tax introduced by the previous administration.

"It's a disappointing GDP figure but a lot of that is due to the uncertainty over the elections," said Trinh Nguyen, a senior economist at Natixis Asia Ltd based in Hong Kong.

"I think the worst is over for Malaysia - the Q2 figure can even be taken as a sign of strength as the government is trying to take difficult steps. The message coming out of Malaysia is that the focus is on fiscal consolidation."

Nor Shamsiah said monetary policy will remain "accommodative" and the economy is on a steady growth path this year and in 2019.

She also relaxed some rules introduced in 2016 to support the ringgit currency, thereby allowing greater flexibility for exporters in management of their export proceeds.

Malaysia's current account surplus narrowed to 3.9 billion ringgit in the second quarter, compared to 15.0 billion ringgit over the first three months of the year.

Moderate inflation projected

Meanwhile Nor Shamsiah said positive labour market conditions and capacity expansion will continue to support robust private consumption and investment respectively, reported Bernama.

She said Malaysia’s macroeconomic fundamentals also remained strong, providing the country with the requisite buffers to effectively manage potential shocks to the economy.

In her statement, she said headline inflation was projected to be moderate going forward but the extent of the moderation would depend on the pass-through from changes in the consumption tax policy.

Underlying inflation, which excludes the impact of changes in the consumption tax policy, is expected to remain relatively stable in the coming quarters supported by sustained private sector spending.

Meanwhile, headline inflation in Q2 declined to 1.3 percent (Q1: 1.8 percent), mainly reflecting the zerorisation of the Goods and Services Tax (GST) rate.

The impact from the GST zerorisation, however, was offset by higher transport inflation.

Nevertheless, the fixing of the RON95 fuel price since March 22, 2018 helped to contain further increases in fuel inflation during the quarter.

In the statement, BNM announced that it is featuring two articles, the first of which – “Divergence of Economic Performance and Public Sentiments” – assesses the disconnect between the strong economic performance and the pessimistic outlook among some Malaysians.

The second – “Transforming Mobile Phones into E-Wallets in Malaysia” – highlights the Bank’s progress in accelerating Malaysia’s migration to e-payments, with a focus on key developments relating to mobile payments and its potential to transform Malaysia’s payments landscape.