4th Quarter 2018 MEO
15th Jun 2018
The Malaysian economy is estimated to grow by 4.7% in 2018 pending the fourth quarter results. There are more data available pointing towards a moderation in growth for this year as we have projected earlier. 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 weakening financial market sentiments. There are still lingering uncertainty in trade directions when the ceasefire on the US-China trade war ends on the 1st March 2019. The mounting trade tensions together with other emerging concerns, including slower growth than expected in emerging market economies and the US government shutdown, are causing instability in the financial market.
The advanced economies as a group is expected to grow at a slower rate this year due to developments in the euro area, although the US growth is on track, albeit on a slower growth path, and Japanese economy is performing better than earlier anticipated. In Europe, there is no conclusion on Brexit in the middle of a lacklustre performance of major economies of the euro area. The FED is expected to raise the policy rate soon and the ECB has also announced to discontinue asset buying. Against such backdrop, the world economy is expected to grow at a slower pace this year. The IMF projected the world economy to grow by 3.5% and improve marginally to 3.6% in 2020, after growing at the estimated rate of 3.7% last year. The effect of the US-China trade war on China, Malaysia's largest trading partner, is apparent as its December manufacturing Purchasing Managers' Index (PMI) has contracted. Apparently, Malaysia's December PMI has recorded an even larger contraction and this is attributed to a declining index of the new goods export orders. Likewise, the Industrial Production Index (IPI) growth has also moderated due to slower growth in the manufacturing index as well as in the mining index. The slower growth in manufacturing, in turn, is due to a moderation in the export-oriented industries. With the backdrop of a slower global growth, the Malaysian economy is relying heavily on domestic demand to steer growth. Accordingly, we maintain our growth projection for this year at 4.5%. The growth is expected to pick up a little bit next year in the range of 4.5-5.5%.
Domestic demand is expected to grow by 5.1%, underpinned by a robust albeit slower growth in private consumption at 6.4%. Consumers are most likely to go for cautious spending due to 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. The 2019 headline inflation however, is expected to be higher at the average rate of 2.0% due to expansionary policy to support domestic demand and a weak ringgit foreign exchange.
The Ringgit is affected by the volatility of the financial market as short-term investors continuously rebalance their portfolio due to monetary policy differential as well as heightened policy uncertainty among developed nations. The balance of portfolio investment for the first half of 2018 was in the red (-RM40.9 billion). At the same time, a weakened external demand was also adding up to the downward pressure on ringgit.
The fourth quarter MIER Consumer Sentiments Index (CSI) dipped to below the optimism threshold (100 points), recording 96.8 points, after two quarters remaining above 100 points. This is the second consecutive drop in a year. The survey results revealed that the index for current household incomes was down from the previous quarter, while inflationary expectations edged up from the previous quarter. Indices for jobs and financial outlook were also down from the previous quarter, although better than the same quarter a year ago.
Public consumption is projected to grow modestly at 1.5%, partly due to the government policy on cautious spending in the effort to address the issue of high public debt and at the same time experiencing reduced revenue without the goods and services tax (GST). The government is anticipated to enhance fiscal stimulus to boost growth as easy money would intensify capital reversal following the monetary policy normalization among developed economies. Nevertheless, due to the lower than expected government revenue this may limit the fiscal space for such policy.
The overall investment growth for this year, private and public, is expected to moderate. This is partly due to the government policy to review selected big-ticket investments in the effort to address the issue of high public debt. This has a spill-over effect on private investment, which in turn will have a negative influence on private consumption. The overall Investment is projected to grow by 3.9%, attributed to 5.3% growth in private investment and 0.5% growth in its public counterpart. The slowdown in investment is due to a moderation in global investment flows and a reduced demand for manufacturing goods. The BOP account shows that foreign direct investment (FDI) for the first three quarters of last year was RM18.7 billion, which was about half of the level of the same period of 2017, RM37.6 billion.
The moderation in investment is also consistent with survey results of the fourth quarter MIER Business Conditions Index (BCI). The capital investment index of the BCI dropped by 12.9% from the third quarter. Likewise, the capacity utilization rate also dropped to 79.2% as compared to 82.8% in the third quarter, reflects a weaker demand. The overall BCI for the fourth quarter slipped into a below the demarcation level of 100-point threshold of optimism (95.3) as compared to 108.8 in the previous quarter and 116.3 in the second quarter- two quarters drop in a row. The drop in the fourth quarter BCI is attributable to the deterioration of the current index (89.5) as the expected index improved (112.5). The fall in the current index is due to a slowdown in the manufacturing sector as shown by the deterioration in indices for sales (-20.0%), production (-21.5%), new domestic orders (-51.8%) as well as new export orders (-10.0%). Meanwhile, the improvement in the expected index is due to the increment in indices for expected production and expected export sales. It shows that businesses are still upbeat about outlook for the first quarter of 2019. Businesses also expected that the first quarter of 2019 employment prospects to remain stable but wages would be rising. The survey result also disclosed that consumers expect prices to remain stable.
The external trade for this year remains challenging as global growth is dwindling. Growth in exports is expected to moderate at 1.5%, a 0.4 percentage point reduction from MIER's earlier projection, as certain downside risks became clearer. Imports growth is also revised downwards by 0.3 percentage point to grow at 1.9%. Both exports and imports are expected to grow faster next year by 3.7% and 4.5%, respectively. The growth of exports of manufactured goods are expected to deteriorate, including for E&E products which accounted for about 40.0% of total exports. This is largely due to the knock-on effect of the US-China trade war. The December manufacturing PMI has shown that China's manufacturing output has contracted, alongside with an even larger contraction for Malaysia's manufacturing output.
The world commodity outlook for this year is not expected to be exiting either. The agriculture sector is projected to grow at a slower pace for this year at 1.3% compared to the impressive growth of 7.2% in 2017. The growth was haunted by sluggish demand and lower prices for palm oil and palm oil-related products. Although the demand from the two largest importers, India and China is improving, a large inventory accumulation in Malaysia and Indonesia exerts a downward pressure on the already cheap prices. Nevertheless, the effect of El Nino is still probable to bring the supply down. Meanwhile the campaign against palm oil by Europe continues to tarnish the industry. Exports of palm oil and palm oil-based products together with oil & gas-based products accounted for about 23.0% of total exports.
The demand for petroleum products is also bleak amid a slower global growth. Meanwhile, crude prices are pressuring downwards due to the oversupply condition. OPEC bids to cut production would be futile as America's shale oil production continues to rise. The beginning of 2019 sees the oil market is gradually rebalancing as the US shale growth is slowing down and OPEC started to cut production. Nevertheless, the weaker than expected growth in China that will further weaken oil demand could upset the market again. Oil prices for this year are expected to settle in the range of USD60-70 per barrel, depending on the demand condition.
Pending the fourth quarter data, current account (CA) of the balance of payments (BOP) for last year is expected to remain in surplus but estimated to be tapering down to RM36.3 billion. The three-quarter balance of the CA now stands at RM22.7 billion. The third quarter CA balance was RM3.8 billion, lower than the previous two quarters. The declining CA balance is partly due to a weakened global demand. Meanwhile, the deficits in the services account, as well as in the primary and secondary accounts, are not expected to improve. This year CA balance is projected to be 2.5% of GNI.