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Executive Summary

Global growth again fell of expectations in 2016. Earlier the International Monetary Fund (IMF) had revised down its global growth projection by 0.1 percentage point in July to forecast a 3.1% growth for 2016. IMF in its latest release maintained the global growth projection for 2016 at 3.1% as subdued global demand persists. Growth prospect for global economy is still fuzzy, bogged down by a few lingering unresolved issues shaping up the global economic arena. Among others, the result of Brexit is still unclear, lower oil prices is still in the backdrop, the slowdown in advanced economies persists and China's rebalancing continues. Moreover, there are few non-economic factors such as the spreading of Zika virus disease from Latin America to other parts of the world, refugee crisis in Europe, upcoming US presidential election and geopolitical conflicts here and there.

As a trading nation, Malaysia is affected by the global slowdown, directly or indirectly. The slowdown of Malaysia's trading partners directly influencing their demand for Malaysian exports. Among the major trading partners, there is not much positive development unveiled this year to renew any short-term prospect. Instead, the US economy is showing a sign of slowing down as its economy is also not insulated from global fluctuations. IMF had revised its US projections twice this year to settle at the rates of 1.6% for 2016 and 2.2% for 2017. For the second time, IMF has revised further its growth projection in world trade volume this year to 2.3% y-o-y from the earlier revised forecast of 2.7% (which was revised from the earlier April forecast of 3.1%). Likewise, the 2017 world trade volume is also revised downward by 0.1 percentage point to 3.8%.

The slowdown of major economies is also affecting other small economies, particularly commodity-exporting countries. This in turn, limiting the demand for Malaysia's exports from these countries. All in all, taking into account the direct and indirect impacts of global slowdown, Malaysia's export demand in the near future is painted with a gloomy picture.

The issue of lower crude oil prices is still relevant to the Malaysian economy. First, oil price is directly contributing towards Malaysia's export earnings, contributing to funds in government coffers. Secondly, better oil prices is expected to revive the current lackluster global growth, which in turn, will improve Malaysia's export demand. The world oil market is still characterized by oil glut due to oversupply amid weak demand. OPEC strategy to maintain market share by crowding out the shale-oil producers backfired as shale-oil production becomes more efficient and non-OPEC, as well as some OPEC, members are pumping more oil to compensate for lower prices. OPEC latest decision on agreeing on capping oil production to 32.5 to 33.0 million barrels per day (bpd) from the current level of about 33.53 million bpd brings a glimmer of hope for better prices. However, the decision on which members to cut by how much will only be decided in November this year.

However, capping the oil production may not be as significant as widely thought, at least for two reasons. Firstly, the inability to implement production control mainly resulting from the flaw of cartel itself. OPEC members themselves have the possibility to cheat by producing more than the agreed capped production, especially for member countries that are heavily reliant on oil production and they may need more revenue to generate for the domestic economy. Secondly, the improved efficiency of shale-oil production will add up to more world oil supply. Therefore, oil prices is not expecting to grow much higher than USD45-55 per barrel in the near future.

The dependency on domestic demand to spearhead economic growth is not a choice for Malaysia, but it is unavoidable as external demand is weakening. Private spending is expected to grow at a reasonable rate supported by accommodative monetary policy. Bank Negara is expected to continue with expansionary policy as inflation rate is tamed at 2.3% for the first eight months of this year, and it is on a declining trend. The monetary policy is also expected to favour businesses through credit creation as household debt is creeping up.

Meanwhile, the coming 2017 budget proposal to be tabled end of this week is expected to see more fiscal measures and incentives to boost businesses, particularly for SMEs. High impact infrastructure projects are expected to continue next year to improve short-term demand as well as to improve productive capacity of the economy in the longer run. To boost private consumption, the policy should be directed towards improving household income, rather than providing direct incentives on spending. Direct income transfers should be implemented on a selected basis, more for welfare reasons rather than for expanding private consumption.

Approaching year-end, both businesses and consumers are less upbeat about the economy. The third quarter 2016 MIER survey results saw a turnaround in both Consumer Sentiments Index (CSI) and Business Confidence Index (BCI) as both indices took a dive. CSI remains below the 100-point threshold of optimism, while BCI has crossed over to a below 100-point threshold of optimism from the above 100-point level registered in the last quarter.

The renewed consumer confidence level built since early of the year failed to maintain its momentum. It shows that in general consumers are pessimistic about the near-term outlook. Current sales and production are slowing down as both sub-indices plunged from the second quarter reading. Both local and export orders declined, as compared to the previous quarter or compared to the corresponding quarter a year ago, and stock levels are on the rise. Short-term outlook remains bleak as expected index recorded a 25.9% decline from the last quarter and 7.9% decline from the same quarter a year ago. Both sub-indices for expected production and expected export sales recorded a drop.

Similar to BCI and CSI, the third quarter 2016 Vistage-MIER CEO Confidence Index also remains below the 100-point threshold of optimism. This suggests lack of confidence among businesses with overhanging negative sentiments in the Malaysian economy. Both components of current and expected economic conditions worsen from the previous quarter, a turnaround from an improved sentiments for the last quarter, reflects lack of fresh promising signals of optimism towards year end.

MIER maintains Malaysia's real GDP growth for 2016 at 4.2%. As the external sector remains sluggish, more weight is given to the domestic demand to steer growth. Bank Negara is expected to continue pursuing an accommodative monetary policy favouring businesses as household debts are creeping up. The expansionary monetary policy is expected to continue for the rest of the year as well as for next year since the price level is kept under control to complement the expansionary fiscal policy. Growth will be driven largely by private sector expenditures as liquidity condition improves. The 2016 domestic demand growth, which have been revised upward by 0.1 percentage point in July from our April 2016 projection, is maintained at 4.6%, as a result of an improvement in private consumption. Meanwhile, the revised private investment growth is also maintained at 5.5%. Public investment is expected to pick up the shortcoming by growing at 1.4%, a turnaround from a negative growth of 1.0% last year. Public infrastructure development is expected to continue as planned.

Meanwhile, net exports are expected to moderate further as external demand remains sluggish. As such, we have revised downward Malaysia's net exports annual growth from our April projection of 1.2% to a contraction of 0.5% on account of a slower growth of exports with the rate of 2.5%, down from the April projection of 2.7%. Meanwhile, imports are expected to grow stronger at 2.9% (2015: 1.2%), mostly anticipated for intermediate and capital goods, which is good for future production and exports. We maintain our outlook on the external sector as there is no significant development influencing Malaysia's trade flows.

As for 2017, real GDP growth is expected to edge up moderately, registering growth of between 4.5 - 5.5%. Domestic demand continues to be the engine of growth by growing at 5.0%. However, the export demand is expected to improve further growing at 3.0% a year. Current account balance is expected to deteriorate this year estimated to be 1.8% of GNI, but it will rebound in 2017 as export demand improve further. The inflation rate projection for this year is revised downward to 2.2% from our earlier projection of 3.0%, due to favourable price development for the past eight months. Inflation projection for 2017 is maintained at 2.7%.

Posted by suzy at 11:33 AM