« MEO2Q2018


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Executive Summary

After performing better than expected last year growing at 5.9% a year, the Malaysian economy is expected to grow at a slower pace this year as well as next year, putting less stress on the domestic demand. The interim data so far are pointing towards slower growth than earlier anticipated. The first quarter GDP grew at 5.4% and further moderated to 4.5% in the second quarter. The latest trade data reflected the sign of a weakened global demand. The August trade balance was the lowest since November 2014 at RM1.6 billion. This is consistent with the declining index of the export-oriented industries in the IPI since the beginning of the year.

The better-than-expected global growth last year is finally come to an end. All signs are pointing to a weakening global demand as the world economy has settled into a slower pace of growth. Global demand is disrupted by the renewed protectionist sentiment. The heightened US-China trade war instils the fear of uncertainty in many economies including Malaysia. A reduction in China's exports to the US is expected to have a significant knock-on effect on Malaysia's export demand. Malaysia is expected to be severely affected, only second to Taiwan. Many China's exported goods to the US contain Malaysia's components, especially for the electrical and electronic products.

Production disruption is already felt in many economies reflected in production indices. Malaysia's latest Industrial Production Index (IPI) recorded a decline in the manufacturing index of the export-oriented industries. Likewise, the Markit's global Purchasing Managers' Index (PMI) fell for the past five months. The new export orders of the global PMI fell to the lowest since May 2016 pointing to a weakening world trade. The PMI for Emerging Asia shows that the manufacturing sector is losing momentum as the new export orders weakened.

Malaysia's growth continues to be driven by domestic demand, which in turn is dominated by private consumption. Nevertheless, the continued reliance on private consumption to spearhead growth doesn't augur well with the slowdown in investment activities. The BOP account shows that FDI for the first half of the year was about half of the level of the same period last year. The overall investment growth for this year, private and public, is expected to moderate. This is partly due to the government policy to review on the 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. Meanwhile, the portfolio investment in the BOP account recorded a substantial negative balance of RM40.9 billion in the first half of 2018. This will exert a downward pressure on the value of ringgit, which in turn influencing negatively on domestic production and consumption. The ringgit-USD exchange rate is on the rising trend (ringgit is weakened against USD) since the beginning of the year. For this year to date, ringgit has lost close to 7.0% of its value against USD compared to its peak in the first quarter.

Against the backdrop of a moderation in global demand and overreliance on private consumption amid the weakened investment activities to steer growth, we expect that GDP will grow at a slower pace. The GDP growth is revised downward by 0.8 percentage point to 4.7% from our earlier forecast of 5.5%. The slow pace of GDP growth is expected to persist into next year, in the range of 4.5-5.5%. Domestic demand continues to drive growth and it is expected to grow at 5.5%, slower than last year's growth of 6.5%, underpinned by a robust growth in private consumption, though moderating, compensating a moderation in public consumption. The modest growth in public consumption is partly due the government policy on cautious spending in the effort to address the issue of high public debt and simultaneously with the reduced revenue without goods and services tax (GST).

Our survey data also indicate that consumers are less optimistic on their perception on the economy as compared to the previous quarter. After recorded the highest reading in 20 years in the second quarter of this year, the third quarter's MIER Consumer Sentiments Index (CSI) slipped by 25.4 points from the last quarter. Nevertheless, the index is still above the demarcation level of 100 points threshold of optimism (107.5), although failed to maintain the level of optimism of the previous quarter (132.9 points). Consumers still indicated steady spending plans but more selective. Notwithstanding a downbeat sentiment as compared to the previous quarter, consumers are still optimistic compared to the same quarter of last year pertaining to their current incomes, expected incomes and employment outlook.

Consistent with the interim data on several economic variables thus far, the third quarter MIER's Business Conditions Index (BCI) is also pointing to a slower growth ahead. The third quarter index slipped by 7.5 points from the previous quarter but 5.8 points better than the same quarter of last year (2Q2018: 116.3 points; 3Q2018: 108.8 points). Businesses are still optimistic about the current situation as the current index improved from the previous quarter (2Q2018: 110.2 points; 3Q2018: 113.0 points). This is supported by the increase in indices for sales, new domestic orders as well as new export orders (+1.0 point; +9.3 points; +10.0 points, respectively). On the contrary, the production index fell slightly from the previous quarter (2Q2018: 57.7 points; 3Q2018: 53.5 points), in concurrence with the fall in the export-oriented industries index of the IPI.

Unlike the current index, the expected index for the third quarter fell significantly by 38.2 points as compared to the previous quarter (2Q2018: 134.7 points; 3Q2018: 96.5 points). The index slipped into a below the demarcation level of 100-point threshold of optimism. This is consistent with the expectation of a slower pace of global growth. A fall in the expected index is attributed to the fall in all the expected sub-indices, namely expected production (-22.8 points) and expected export sales (-15.4 points). The pessimistic business expectation is also revealed by a reduction in the indices for capital investment (-7.2 points) and capacity utilization (-0.5 points) as compared to the previous quarter. Meanwhile, the capacity utilization rate decreased marginally by 0.3 percentage point from the previous quarter (2Q2018: 82.8%; 3Q2018: 83.1%).

There are more signs are pointing towards a soften Malaysia's external demand. MIER analysis shows that exports demand is expected to grow at a slower pace of 1.4% (2017: 9.4%) as compared to the growth in imports at 2.0% (2017: 10.9%). Above all, the overall slowdown in global demand is directly influencing Malaysia's export demand. The slower pace of growth in developed economies is directly reducing their demand for the manufactured goods. The world demand for commodity from Malaysia is also expected to go down. For the agriculture commodities, particularly the palm oil and palm oil-based products, the demand is expected to decrease due to both a reduction in volume coupled with cheaper prices.

The exports for petroleum products are expected to shrink due to a weaker demand for energy, as production subsided coupled with the rising prices. Lower quantity demanded for petroleum products cancelled out the gain of rising prices, if any. The price of crude oil (Brent) registered a four-year high in the first week of October, reaching an 85-dollar mark. The rise in crude oil prices is due to supply worries as the second round of US sanctions on Iranian oil is approaching and lower US crude and gasoline stocks. The worry over supply seems to outweigh OPEC's output rise despite a reduction in Iranian and Venezuela outputs. The largest increase in OPEC's production in September came from Libya, Angola, Nigeria and Saudi Arabia. Nevertheless, crude prices is expected to ease up next year on the back a slowdown in global demand. Oil import demand from oil importing countries are expected to slow down, including from China and India. The Brent price is anticipated to ease up to a below USD80 mark towards the end of the year and further slip to the range of USD60-70 next year.

Current account (CA) is expected to remain in surplus for this year but tapering to a below RM30 billion mark (2017: 40.3 billion). This is due to a decreasing balance in the goods account as the global demand moderated. For the first eight months of this year, total trade balance in goods was RM70.4 billion, which is below the trend for last year (2017 goods balance: RM116.8 billion). Meanwhile, the deficits in the services account, as well as in the primary and secondary accounts, are not expected to improve. Therefore, there is a concern on the ability of the economy to maintain a healthy CA surplus.

Although the headline inflation for this year was expected to be moderate in the first place, it turned out to be well below than expected. The headline inflation averaging out at 1.3% for the first eight months of the year. Thanks to cheaper foods and transportation prices despite higher oil prices and cheaper ringgit. With the revealed data so far, the headline inflation projection is revised downward from MIER earlier forecast of 2.0% to the average rate ranging from 1.4%.

Posted by kala at 03:10 PM