Preliminary GDP Forecast: Malaysia

Update (November 13, 2015). Official statistics show that Malaysia grew at 4.7%, higher than the ARIMA forecast of 4.5% below. Read more here.
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Using seasonally adjusted quarterly GDP data from 2005, I estimate that Malaysia’s economy will grow by approximately 4.8% in 2015 and 4.9% in 2016. I applied the autoregressive integrated moving average (ARIMA) model to derive quarterly forecasts for 2016 and 2017. Year-on-year growth during 2015Q3 is expected to come in slightly lower (4.5%) than second quarter growth (4.9%) due to EM headwinds from a weakening China, one of Malaysia's leading trade partners. Growth in 2016 might come in higher than ARIMA would predict because the 11th Malaysia plan projects will start to kick in. The country needs to grow by 5-6% per year if it is to reach the high income goal by 2020. (Actual data for 2015Q3 will be made public on November 13th according to the Malaysian economic calendar).

A Note on ARIMA Models

With the ARIMA methodology, the focus is not on constructing a single-equation or simultaneous-equation model but on analyzing the probabilistic, or stochastic properties of economic time series on their own under the philosophy of let the data speak for themselves (Gujarati and Porter, 2009). Unlike the regression models, in which Yt is explained by k regressors X1, X2, X3…Xk, ARIMA models allow Yt to be explained by past, or lagged, values of Y itself and stochastic error terms. The output above is the best version as detected by an automatic algorithm in R.

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