1st Quarter 2019 MEO
16th April 2019
The Malaysian economy grew by 4.7% in 2018 as projected by MIER. The economy is set to grow at a slower pace this year due to the slowdown in global demand as well as in domestic demand. The US-China trade war continues to be the major downside risk for the world growth although there has been positive progress made by China to Washington's requests during the 1st December Summit. Washington demanded Beijing to make structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.
The global economy continues to grow at a moderate pace amid a brittle demand and lessened trade flows. There are growing risks to the global growth tilted to the downside, predominantly due to factors related to trade policy uncertainty and the weakening financial market sentiments. Mounting trade tensions together with other emerging concerns, including slower growth than expected in the emerging market economies, is causing instability in the financial market. Against such backdrop, the world economy is expected to grow at a slower pace this year. The IMF projected that the world economy to grow by 3.3% and improve marginally to 3.6% in 2020, after growing at the rate of 3.6% last year.
The global economic slowdown is led by stagnation in manufacturing output due to declining global export orders. This is reflected in the February global PMI. Besides the manufacturing output, the services sector also reported a weaker growth. The pan-Asia manufacturing PMI declined for the first time in two and a half years. Among the countries that recorded a decline in their PMI are China, Taiwan, South Korea, Indonesia as well as Malaysia. For Malaysia, the slowdown in manufacturing activities is reflected in the declining Industrial Production Index (IPI). The monthly manufacturing IPI growth averaged out at 6.1% in 2017, slowing down to 4.8% last year and further down to 4.2% in January this year. The slower growth was underpinned by moderation in the export-oriented industries (average growth 2017: 6.7%; 2018: 4.4%). The growth was somewhat compensated by the domestic-oriented industries (average growth 2017: 5.0%; 2018: 5.6%).
China is also expected to grow at a slower pace this year. The weakened China growth has contagious effect on many world economies including Malaysia mostly through the trade channel. Meanwhile, there is no conclusion on Brexit in the middle of a lacklustre performance of major economies of the euro area. The recent announcement by the US to impose tariff on US$11.0 billion EU products is adding up more pressure on the global trade. The US economy is also set to be on a slower growth path. The FED is expected to maintain the policy rate as the economy is growing at a slower pace. The US unemployment rate is higher than expected and inflation rate is tame at a below 2-percent mark due to lower energy prices. This is contrary to the earlier expectation that the FED will increase the policy rate as economic growth accelerated.
The global manufacturing downturn is in agreement with the 1Q2019 MIER Business Conditions Index (BCI). The index fell to below the demarcation level of 100-point threshold of optimism for two quarters in a row. In the first quarter of 2019 the BCI slipped further down by one point from the fourth quarter (4Q2018: 95.3 points; 1Q2019: 94.3 points). The drop is apparently due to the current index as it fell to 88.6 points from the already below the optimism level of 89.5 in the previous quarter. While the expected index is still above the optimism level (111.4), although 1.1 point below the fourth quarter reading. Both sales and new export orders fell. The fall in new export orders is more conspicuous, that is a drop of 30.4% from the previous quarter. Nevertheless, the manufacturers are still optimistic about the near future. Indices for capital investment and expected export sales rose as compared to the fourth quarter 2018. The capacity utilization rate also recorded an increase, from 79.2% in the fourth quarter to 81.4% in the first quarter. As oppose to export demand, the new domestic orders recorded an improvement from the previous quarter.
With the backdrop of a slower global growth, the Malaysian economy is relying heavily on domestic demand to steer growth. Nonetheless, the domestic demand is expected to grow at a slower pace from what was previously anticipated. The growth is revised downwards by 0.7 percentage points to 4.4% as compared to our earlier forecast. The anticipated slowdown in domestic demand is attributable to a slower growth in both consumption and investment demand. Private consumption is expected to grow by 6.2% (0.2 percentage-point downward revision), while the public counterpart is also set to grow at a slower rate of 1.1% (0.4 percentage-point downward revision). Likewise, the growth in investment demand is also revised downwards by 1.7 percentage points to 2.2%. The growth in investment is mostly expected to come from the private sector as the government continues to address the issue of high public debt in the expense of investment spending. The slowdown in private investment is due to a moderation in global investment flows and a reduced demand for manufacturing goods. The BOP account shows that the inflow of FDI for last year was RM32.6 billion compared to RM40.4 billion in 2017.
Similarly, the growth in net exports is expected to slow down further to a negative 3.4% from the previous forecast of negative 1.5%. Imports growth is also revised downwards by 0.3 percentage points to grow by 1.6% (2017: 10.9%; 2018: 0.1%). Both exports and imports growths are expected to improve next year, growing by 3.7% and 4.5%, respectively. Notwithstanding the downward revision of the forecasts on the domestic demand as well as on the external demand, we maintain our growth projection for this year at 4.5% due to a higher base effect. Last year GDP was higher than expected due to a faster pace of growth in private consumption as well as better than expected export demand in the fourth quarter.
Consumers are most likely to go for cautious spending on the concern of the so-called high cost of living, although prices are under control and household debt burden is declining. The average headline inflation for 2018 was tamed at 1.0%, below the earlier expectation. While for the first two months of this year inflation rates were in negative territory. The household debt to GDP ratio has been improving over the years recorded 83.8% in the first half of 2018 (2017: 84.2%). The first quarter (1Q2019) MIER Consumer Sentiments Index (CSI) continued to dip further to 85.6 points from the already below optimism threshold level of 100 points in the fourth quarter of last year (96.8 points). This is the third consecutive drop. The survey results revealed that the index for current household incomes was flat compared to the previous quarter and incomes are expected to decrease in the coming months. The surveys also revealed that job outlook is unfavourable.
The world commodity outlook for this year is mixed. For the agriculture commodities, particularly the CPO, the demand is expected to improve according to the MPOB due to both an increase in volume coupled with better prices. The price of CPO is expected to touch RM2,700 a tonne this year as compared to the average price of RM2,232 for last year. This is mainly due to the increase in demand for biodiesel and weak ringgit. Malaysia is embarking into the full implementation of the B10 biodiesel for transport sector since the 1st February of this year (10% biodiesel blended with 90% petroleum diesel). Meanwhile, Indonesia is already ahead with the implementation of B20 biodiesel. In the meantime, production is expected to increase to 20.3 million tonnes, 4.0% increment from last year, due to the favourable weather and the increase in matured plantations.
The demand for petroleum products is bleak amid a slower global growth. Nevertheless, crude prices are rising after bottoming out at the end of last year. This is mostly due to supply disruption within OPEC producers as demand remains weak. Oil prices are creeping up after hitting almost a two-year low at the end of last year at US$52.2 a barrel for Brent crude oil. For now, Brent prices are hovering around US$70.0 per barrel underpinned by both demand and supply factors. On the supply side, OPEC production was down in March to 30.23 million barrel per day (bpd), the lowest in more than four years. Saudi production was the lowest in a year in addition to a supply disruption in Venezuela and Libya as well as the US sanctions on Iranian oil. Nevertheless, the rise in the US rig count pressures oil prices downwards. On the demand side, positive development on the US-China trade war so far has somewhat improve the global energy demand. Oil prices for this year are expected to settle in the range of USD60-70 per barrel, depending on the demand condition. Exports of palm oil and palm oil-based products together with oil & gas-based products accounted for about 23.0% of total exports for Malaysia.
The current account (CA) of the balance of payments (BOP) for last year remained in surplus but tapering down to RM33.5 billion, lower than expected. The CA balance for 2017 was higher at RM40.3 billion. The declining CA balance is partly due to a weakened global demand. However, the deficit in the services account for last year has improved to-RM19.7 billion from-RM22.2 billion in 2017, could be related to cheaper ringgit. Anyhow, cheap ringgit causing the worsening balances of the primary and secondary accounts. This year CA balance is projected to be at 2.5% of GNI.
The negative headline inflation for first two months of the year is a concern. Both the forces of cost-push and demand-pull are in effect causing negative inflation rates. On the demand side, slower money growth for the first two month of the year pointing to a lower demand for money. Loans approved and disbursed are also declining during the same period. From the supply side, there is also an indication that the negative headline inflation is causing by cheaper production costs. The non-core component, particularly the transport item, attributed to the volatility in the headline inflation. The transport index declined by 7.8% and 6.8% for January and February, respectively. The decline in the transport index in turn is due to cheaper oil prices. Cheap oil prices benefited producers through lowering production cost as witnessed by negative PPI for the past few months. Apparently cheaper production cost is passed to consumers. Nevertheless, the effect of the rise in transport index on the headline inflation is not expected to last as oil prices are trending upwards after hitting the lowest in two years at the end of last year. The headline inflation is expected to edge up the rest of the year averaging out at 1.3% due to the expansionary policy to support domestic demand and weak ringgit foreign exchange as well rising oil prices.