MEO 3Q 2008
The global economy is under threat of a recession with the contagion from the US financial chaos spreading worldwide. Despite concerted interest rate cuts and massive liquidity injection, the credit crisis continues to deepen without signs of abating. Confidence has been badly dented with banks fearing to lend out while governments have raised the limits of deposit insurance to shore up confidence. Conditions would deteriorate further if the credit squeeze dries up funds for investment and household spending. The IMF foresees the impact on the global economy becoming more severe in 2009, with global growth projected to slow down to 3.0 percent, the slowest rate since 2002 ('08: 3.9%). In view of the ailing US economy, the IMF has drastically lowered the US growth forecast to a stagnant 0.1 per cent in 2009 ('08: 1.6%). The spillover effects are predicted to slash Europe's growth to 0.2 per cent in '09 ('08: 1.3%), and to soften Japan's expansion to 0.5 per cent ('08: 0.7%).
The Malaysian economy has been resilient in the first-half of 2008, but is increasingly being affected by the global downturn. GDP growth has moderated to 6.3 per cent in 2Q08 after a strong 7.1 per cent gain in 1Q08, bringing growth to a high average of 6.7 per cent in the first-half. The growth was driven by high commodity prices, strong private consumption and steady investment, partly supported by fiscal spending. Malaysia has no direct exposure to the US market but is increasingly feeling the shock from the slowing US economy through trade and investment linkages. The external downturn has not reached bottom yet. The US economy is on the brink of a recession, Japan has reported a contraction and Europe is coming to a standstill. Singapore has gone into recession in 3Q08 based on quarter-on-quarter growth.
Fearing a dismal global outlook and hit by rising prices of raw materials, the government stretched the fiscal deficit to 4.8 per cent in '08, reversing a 9-year progressive deficit reduction. This may be justified as difficult times call for drastic measures. The longer-term worry is the high dependency on oil revenue to finance fiscal spending. Government revenue will be affected by the decline in commodity prices if other sources of revenue are not sought. Given the heightening pressure on the economy and decreasing oil prices, the budget deficit is likely to exceed 5.0 per cent of GDP in '08. The deficit may even exceed 4.0 per cent of GDP in '09 with the increasingly unnerving outlook.
Monthly indicators up to Jul/Aug'08 are starting to lose momentum. Industrial output is flattening further as the export-oriented sectors faced diminishing demand. Total exports have decelerated with electronics exports stalling, while commodity revenues are growing at a slower pace. The leading index is creeping up at its slowest pace this year, suggesting sluggish growth ahead. Inflationary pressures have gathered steam, with elevated food prices lifting inflation to 8.5 per cent in Aug'08. Despite small reductions in oil prices, domestic inflation has remained sticky so far.
Despite soaring inflation, the Overnight Policy Rate (OPR) has been kept at 3.5 per cent in view of the worsening downturn in the US economy and its potential negative effects on the domestic economy. With the risk of a severe economic slowdown exceeding that of inflation, the policy rate has been kept unchanged. The backlash to demand conditions will likely lead to the softening of inflation. Oil prices have fallen as demand subsides with the increasing slack in economic activity.
Consumer and business confidence indices have both dropped below the 100-points mark, the dividing line between optimism and pessimism, as indicated by the results of MIER's 3Q08 surveys. The Business Conditions Index (BCI), which is based largely on firm-level information, has slipped to 99.6 points in 3Q08 from 114.1 points in 2Q08, down 14.5 points, indicating that business confidence has deteriorated. Though still below 100-points, the Consumer Sentiments Index (CSI) has stabilised somewhat in 3Q08, rebounding to 88.9 points from the historical low of 70.60 in 2Q08, aided by recent moves to lower domestic oil prices and bonus payment to public servants. With both indices staying below the threshold, the outlook for the Malaysian economy appears to be lacklustre.
With the financial crisis still unfolding and confidence failing, the bigger fear is the credit squeeze. Tight credit will have grave implications on consumer spending and investment activity, crippling the already slowing economy. The damage to the global economy will be deeper in 2009 with all major economies expected to slow down markedly. In hindsight, when the internet bubble burst in 2001 and OECD countries languished to a 1.2 per cent growth, Malaysia's growth came to a halt ('01: 0.5%). The IMF predicts the OECD to weaken to 0.5 per cent growth in '09, putting Malaysia's prospects in jeopardy. The internet crash did not lead to a banking crisis so the recovery was faster. The current crisis has done extensive damage and is nowhere near the bottom.
The US has managed to post a good growth in 2Q08 (2.8%) and delay a severe slowdown thanks to tax rebates, a previously weak dollar, and the cut in interest rates. In light of the resilient US economy and the higher-than-expected domestic growth during the first-half of 2008 during that period, we are adjusting our estimates for GDP growth in '08 to 5.3 per cent, from 4.6 per cent previously. It is likely that growth would deteriorate in late '08, as the Malaysian economy takes the hit from the knock-on effects of a flagging global economy. Domestic demand will be propped up by fiscal spending, providing a partial cushion to the uncertain global economy. Falling commodity prices are not helping either, but may help soften inflationary pressures. The services sector will be the pillar of strength amidst a weak manufacturing sector. With the outlook for the global economy turning increasingly dismal, Malaysia's GDP growth could decelerate to 3.4 per cent in '09 ('08 5.3%). The downside risks of further fallout from the financial woes have amplified, meaning that unpleasant possibilities are not totally excluded.
Posted by suzy at 02:07 PM
MEO 2Q 2008
In April 2008 (Apr'08), under the assumption of oil price at US$96 per barrel, the IMF lowered the world economic growth estimate by 0.5 percentage point to 3.7 per cent in 2008 ('07: 4.9%), while edging up marginally the 2009 forecast to 3.8 per cent. With oil prices breaching US$140 per barrel, the risks of slower global growth have risen. Despite aggressive interest rate cuts and massive liquidity injection, the US credit crisis continues to deepen and spread to the real sector of the US economy. In view of the flagging US economy, the IMF has drastically lowered the US growth forecast by 1.0 percentage point to 0.5 per cent in 2008 ('07: 2.2%). The spillover effects through trade and financial linkages are predicted to reduce Europe's growth to 1.4 per cent ('07: 2.6%), and to soften Japan's expansion to 1.4 per cent ('07: 2.1%). Due to surging oil prices, many Asian countries have slashed fuel subsidies in view of worsening national budgets.
The Malaysian economy has been surprisingly resilient in spite of the global slowdown. In fact, GDP growth was sustained at a strong 7.1 per cent in 1Q08, following a brisk 7.3 per cent expansion in the last quarter of 2007. The growth was driven by high commodity prices, strong private consumption and steady investment, and supported by fiscal spending. So far, Malaysia has only felt a minor impact from the slowing US economy, but emerging challenges in the form of soaring food prices and the persistent rise in global oil prices are weighing down heavily on economic prospects. Fearing a ballooning fiscal deficit, the government announced a revamp in oil subsidy in Jun'08, pushing up petrol prices by 41 per cent and diesel by 63 per cent. This will have adverse implications for inflation and economic growth going forward. Even with the subsidy cut, the fiscal deficit may reach 3.5 per cent of GDP this year as oil prices have increased further, drastically reducing the savings from the subsidy revision.
Monthly indicators up to Apr/May'08 have displayed some surprising movements. Industrial output grew moderately on the back of a fragile rebound in electronics as construction-related sectors powered on. Exports have recorded double-digit growth owing to windfall gains from commodities and the recent upturn in electronics demand. The leading index is rising cautiously, suggesting moderating growth ahead. Inflationary pressures have gathered steam, with elevated food prices lifting inflation to 3.8 per cent in May'08, almost a 2 year high. On account of the oil subsidy review on 5th Jun'08, inflation is expected to jump to about 7.0 per cent in Jun'08, bringing the whole year inflation to 5.0 per cent, if not higher.
The combined effects of higher food and fuel prices have led to increased price pressures, posing a challenge to policymakers amid downside risks to growth. The Overnight Policy Rate (OPR) has been kept at 3.5 per cent in view of the downturn in the US economy and its potential negative effects on the domestic economy. With the rising inflationary pressures amidst steady economic activity, the OPR may be raised gradually, depending upon how serious the secondary effects of inflation will turn out to be from Jun'08 onwards.
Consumer and business confidence has shown downwards movements, as indicated by the results of MIER's 2Q08 surveys. The Business Conditions Index (BCI), which is based largely on company performance, has slipped to 114.1 points in 2Q08, down 5.8 points from a reading of 119.9 points in 1Q08, indicating a surprisingly resilient confidence level in spite of the higher oil prices. Given the resilient domestic demand and the recent rebound in exports, business conditions have been holding ground fairly well. The higher oil prices will lift business costs and this would affect profit margins in subsequent quarters. Shocked by the magnitude of increase in oil prices, the Consumer Sentiments Index (CSI) has fallen very sharply to an all-time low of 70.5 points in 2Q08, from 115.5 in 1Q08, a signal of strong public displeasure. The BCI would be a better indicator of current economic activity as it relies on firm-level information, while the CSI exhibited the collective public reaction to the recent subsidy cut.
There are no clear signs that the external sector is going to turn around any time soon. However, the recent upturn in electronics owing to strong demand in non-US markets has benefited Malaysia's exports. The turmoil currently facing the US economy is part of the adjustment process to rectify the global imbalance. The correction could have happened earlier, had it not been delayed by the prolonged support of the US consumption drive. The greater concern is the impact of higher food and oil prices on the global economy, which will consequently influence domestic conditions. Although some mega projects have been shelved, the allocated fiscal spending for the 9MP has been revised upwards and reviewed to be more people-centred. Strong commodity prices would ensure stable spending power of rural households, but there is a greater concern that prices would reverse once the global growth weakens further.
Taking into account the trends in MIER indices and the impact of higher food and oil prices that could dampen consumption and reduce business profits, we are compelled to lower our growth forecast for the Malaysian economy to 4.6 per cent this year, from 5.4 per cent earlier. It is likely that growth would deteriorate in the second-half of 2008, as the Malaysian economy takes the hit from the knock-on effects of higher oil prices and a slower global growth. Domestic demand will be propped up by sustained 9MP spending, providing a partial cushion to the faltering global economy. In the baseline scenario, as the global economy stabilises and inflation subsides, the Malaysian economy could improve next year, expanding by 5.0 per cent in 2009.
Posted by suzy at 12:55 PM