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Executive Summary

The Malaysian economy performed well above expectations last year. Real GDP grew by 5.9% year-on-year (y-o-y), driven primarily by domestic demand, reinforced by resilient external sector. Private spending remained strong despite weak quarter-to-quarter consumer confidence as the MIER Consumer Sentiments Index (CSI) continues to remain below the demarcation level of 100 points for every quarter since more than three years ago. Buoyant consumer spending is attributable to a stable job market, contained core inflation and a strengthening ringgit, as well as several targeted government transfer programs to boost disposable income.

Capital investment grew rapidly, particularly from the private sector to support growth in demand, domestically as well as from across the borders. Public investments were targeted at key infrastructure projects. The external sector continues to progress as the world trade activities strengthened. The global economy keeps growing stronger than expected underpinned by faster growth in the advanced economies as well as the continued improvements in the emerging market and developing economies. The recovery in manufacturing and trade is gaining momentum, further strengthened by stronger investment activities and buoyant financial markets. Global trade flows grew sustainably underpinned by a continuous global demand, particularly from major economies. External trade grew rapidly with both exports and imports recording a double-digit growth for most of the months last year, due to better-than-expected performance of Malaysia's trading partners.

The growth momentum is expected to continue this year as well next year but on a moderated pace. Real GDP for 2018 is expected to grow by 5.5% and further weakened to the range of 4.8-5.3% next year. The growth will be driven by domestic demand and reinforced by strong external sector. However, Domestic demand is expected to grow at a slower pace of 5.8% y-o-y this year, compared to 6.5% last year, and further moderate to 5.3% next year. Strong growth in domestic demand last year was inflationary as revealed by the CPI headline inflation that averaged out 3.7% last year. As expected, Bank Negara raised the OPR by 25 basis points in January this year to keep demand growth at a manageable pace amidst subdued prices. The first two months of the year already witnessed lower rates of headline inflation, 2.7% in January and 1.4% in February. For the whole year, the headline inflation is projected to be at 3.0% and rebound to 3.2% in 2019.

The good run of the external sector is expected to sustain into this year as well as next year. Nevertheless, the growth in both exports and imports is expected to moderate this year as compared to last year (exports: 2.7%; imports: 2.8%), mostly due to the base effect. However, the growth in net exports of goods and services is expected to be positive this year (1.9%). For 2019, exports and imports of goods and services are expected to grow by 2.2% and 2.4%, respectively.

The current account of the BOP data for 2017 unveiled better surplus than expected, consistent with the better-than-expected trade performance for 2017. The balance on the current account for 2017 was 3.1% of the gross national income (GNI). The balances on the current account for 2018 and 2019 are projected to be 2.6% and 2.5% of GNI, respectively. Simultaneously, the deficit in the services account is widening owing to high dependency on foreign services, particularly for freights and hauling. Furthermore, sizeable deficit in the primary income persists as a result of high dependency on foreign labour.

Although still below the 100 points demarcation level of confidence, the 1Q2018 CSI is the highest since 3Q2014 indicating consumer sentiments have improved although there is still lack of confidence. The CSI for the 1Q2018 improved to 91.0 points from 82.6 points in the last quarter (4Q2017) and 76.6 in the same quarter a year ago (1Q2017). The CSI survey results revealed that consumers' current incomes in 1Q2018 have improved as compared to the previous quarter as well as from the same quarter last year. Likewise consumers are more optimistic about their future incomes as compared to the fourth quarter of 2017 as well as compared to the same quarter of last year. Consumers also revealed that the employment outlook for the first quarter of 2018 was better than the previous quarter as well as the same quarter of last year.

In contrast to the CSI, the 1Q2018 MIER's Business Conditions Index (BCI) tumbled to below the demarcation level of 100-point threshold of optimism, the first time since the 4Q2016. The first quarter BCI reading was 98.6 points, 2.9 points lower than the previous quarter. A reduction in the overall BCI is attributed to the current index as it slipped by 12.5 points to record 91.0 points, while the expected index surged by 25.6 points, recording 121.1 points from 95.6 points in the previous quarter.

A reduction in the current index is coherent with the previous quarter result which shown that the expected index fell by 14.3%. Therefore, the expected index serves as a good leading indicator for a quarter ahead. The survey result shows that a fall in the current index is contributed by a slowdown in both production and sales, particularly owing to a reduction in new domestic orders. Despite pessimistic in both current production and sales, businesses were running at a high rate of capacity utilization, 80.0%, as compared to 77.4% for the previous quarter. The surge in the expected index indicates businesses are optimistic about the next quarter. Both indices for expected production and expected export sales improved by 12.2 points (25.5%) and 13.4 points (28.1%), respectively. The optimism among businesses is reflected in the surge in capital investment index by a hefty 12.5 points (25.0%). Nevertheless, businesses are still very cautious on a longer perspective since the expected index for the 1Q2018 is 14.9 points below the index for the 1Q2017. The indices for both expected production and export sales for the 1Q2018 are 6.0 and 8.9 points, respectively, below the same quarter of last year.

On the supply side, the services sector is expected to contribute significantly to the 2018 GDP growth as indicated by strong investment in the sector last year. Total approved investment in 2017 was RM197.2 billion, 61.4% of it came from the services sector, and expected to create 58.9% of the total 139.5 thousand new jobs. The sector is projected to grow by 6.0% this year, marginally slower than last year (6.2%), contributing to 54.7% of total GDP. The growth in the services sector is projected to moderate next year at 5.8%. The manufacturing sector is projected to grow by 5.5% y-o-y, slower than last year's growth of 6.0% and moderated to 4.9% next year. External demand continues to drive the manufacturing sector. Stronger growth in the world trade volume anticipated for the next two years provides impetus for positive investment in the sector. The MIER's 1Q2018 BCI indicates strong appetite for domestic capital investment. Nevertheless, an increase worldwide competition on manufactured products amid a growing protectionist attitude among some major economies may affect Malaysian manufacturers.

The agriculture sector is projected to grow at slower rates for the next two years, after recording an impressive growth of 7.2% last year. The sector is expected to grow by 4.0% this year and further moderate to 3.1% next year. The growth is underpinned by strong demand for palm oil and palm oil related products. Nevertheless, production growth is restrain by a limited growth in the new area and an increasing level of tree stress. Meanwhile, demand for the Malaysian palm oil is tilted downwards notably due to India's recent hike in import tax on edible oils, from 15% to 30% and a proposed ban on the use of palm oil in biofuels by the EU. The growth in the mining and quarrying sector is expected to remain in moderate due to the crude oil production-price saga, despite an improvement in prices of late. Meanwhile, the construction sector is expected to grow healthily by 7.0% this year and 6.5% for next year. The growth is supported by continued implementation of public sector infrastructure projects, property and real estate developments, although its percentage point contribution to real GDP is small, accounting for less than 0.5 percentage points.

Political and policy uncertainties are among major downside risks to the global growth. The rise of protectionism among some major developed economies will hamper trade and immigration flows and this in turn will have implications on production and income growth for some major economies. Protectionism policy will inevitably invite retaliation from other countries. The upshot of the current trade war between China and the US on global trade flows is unclear. It could be a new shift in global economic strategic direction from ultraliberalism towards somewhat protectionism.

Geopolitical risks are major noneconomic factors influencing growth prospect for the global economy. Military confrontation on the Korean Peninsula and territorial disputes in the South China Sea can easily be escalated into a more serious threat to the global stability, which in turn, will weighing down on the global growth prospect. The escalation of proxy conflicts in the Middle East into direct confrontations could destabilize the already fragile oil markets. The risk of falling oil prices is still in the horizon awaiting OPEC deal to curb production breaks down. Meanwhile, the immigration issues across the world continue to exert pressure on economic growth, particularly in the euro area.

Posted by suzy at 10:44 AM