MALAYSIAN ECONOMIC OUTLOOK


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 on April 17, 2018

MALAYSIAN ECONOMIC OUTLOOK


Executive Summary



The Malaysian economy performed exceptionally good last year driven by a resilient domestic demand due to the improvements in both investment and consumption and reinforced by a sturdy global demand. The first three quarters displayed a better-then-expected performance with the real GDP growing by 5.6% in the first quarter and accelerating to 5.8% and 6.2% in the second quarter and third quarter, respectively. The fourth quarter data did not show any signs of slowing down either, with sustained manufacturing activities as shown by a growing Industrial Production Index (IPI) supported by a double-digit growth in exports. All in all, the Malaysian economy is estimated to grow at 5.6% in 2017, a 0.8 percentage point upward revision from MIER earlier of the year forecast.



Domestic demand for last year grew faster than anticipated earlier. We have revised the growth in domestic demand upwards by 0.2 percentage points, to grow at 5.0% y-o-y, on the back of better performance in the first three quarters of 2017. Both private consumption and private investment are expected to outpace the previous year's growth, pending on the fourth quarter data. Private consumption is expected to grow by 6.2%, a 0.1 percentage point upward revision from our earlier forecast. The first three quarters have seen the growth in private consumption surge to 6.6% in the 1Q2017, 7.1% in the 2Q2017, and further elevated to 7.2% in the 3Q2017, already surpassing last year's growth of 6.0%. Buoyant consumer spending is attributable to a stable job market, contained core inflation and a strengthening ringgit, as well as several government measures to boost disposable income as announced in the 2018 Budget.


The 4Q2017 MIER Consumer Sentiments Index (CSI) improved by 5.5 points to 82.6 compared to the previous quarter (3Q2017: 77.1 points) and also higher than the same quarter of last year (4Q2016: 69.8), although it remains weak as the index stays below the demarcation level of 100 points. The survey results revealed that consumers' current incomes have improved as compared to the previous quarter as well as from the same quarter of last year. Consumers revealed that they are optimistic about their future incomes as compared to the third quarter of 2017 as well as compared to the same quarter of last year. Nevertheless, the employment outlook for the fourth quarter of 2017 is not as good as the previous quarter but better than the same quarter of last year. Consumers also revealed that they are cooling off their spending plans.




The 4Q2017 MIER's Business Conditions Index (BCI) revealed that businesses remained optimistic as the index is above the demarcation level of 100-point threshold of optimism, although the index fell marginally by 1.6 point (3Q2017: 103.1; 4Q2017: 101.5). Businesses are particularly gloomy on future conditions as the expected index fell by 16.0 points (-14.3%) to 95.6, which is below the demarcation level of 100-point threshold of optimism (3Q2017: 111.6). The current index, however, improved by 3.2 points and is still above the demarcation level of 100-point threshold of optimism (3Q2017: 100.3; 4Q2017: 103.5). On y-o-y basis, the 4Q2017 BCI increased significantly by 25.0% compared to the same quarter of last year despite lower than the previous quarter (4Q2016: 81.2).


Referring to specific indices, the following sub-indices increased from the previous quarter: sales (+12.2%), production (+3.8%) and new domestic orders (+38.7%). While the declining indices were recorded for capital investment (-12.0%), capacity utilization (-18.5%), expected production (-15.8%) and expected export sales (-13.0%). While the index for new export orders has not change from the previous quarter. Clearly, the domestic sector is more hopeful as compared to the external sector, a reversal from the result of the previous quarter. Nevertheless, the BCI captured business perception only on the one-quarter-ahead basis and it is inferior in terms of assessing long-term expectation. Therefore, the weighing down on the external sector by businesses does not imply inconsistency with the painted buoyant external demand. It is rather a short-term readjustment on businesses. Meanwhile, the capacity utilization rate for the 4Q2017 deteriorated by 6.2 percentage points from the previous quarter (3Q2017: 83.6%; 4Q2017: 77.4%).


Most major economies performed better than expected last year. A combination of fiscal stimulus and monetary easing propelled private investment and spending in some major economies. Most of the expected risk factors are tilted towards the upside potentials. This had a shockwave on the global trade flows. Export demand in the exporting countries particularly the emerging market and developing economies grew remarkably. A depressed currency of many exporting countries, including Malaysia, amid a strong US dollar (USD) intensified their export growth. Although the USD is declining against most currencies, it is still above the pre-crisis (the collapse of crude oil prices) of the mid2015. For instance, ringgit was appreciating against USD for most of the 2017 but fall short of the pre-crisis value (about RM3.50 per USD).



A better-than-expected performances of many economies triggered an upward revision for their growth forecasts. The IMF had revised upwards its forecasts for most economies for last year to the already better growth than 2016. The growth of world trade volume in 2017 is estimated by IMF at 4.2% y-o-y (0.4 point upward revision from earlier forecast) as compared to 2.4% in 2016 and moderated a bit to 4.0% this year. The IMF forecasted that the world economy to grow at 3.6% last year and improving marginally to 3.7% for 2018.


The advanced economies as a group is projected to grow at 2.2% last year and moderating to 2.0% this year. The emerging market and developing economies continued to provide the impetus for the world growth with the projected growth at 4.6% in 2017 and accelerating to 4.9% this year, led by the emerging and developing Asia with a sustained expected growth at 6.5% for last year as well as for this year.


The developed economies, particularly, the US and the EU, are expected to tighten their monetary policy this year as their growth hastened. Nevertheless, it is not expected to have a significant impact on the real sector in Malaysia directly, but it will influence the direction of short-term capital flows worldwide. The uncertainty of the timing of monetary normalization poses a risk to the forecast. Other than that, 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 also invite retaliation from other countries. It could be a new shift in global economic strategic direction from ultraliberalism towards somewhat protectionism market. The protectionism sentiment has a widespread contagious effect particularly in the euro area. Anti-immigrants emotion is growing and poses a delicate socioeconomic global catastrophe.


Geopolitical risks are major noneconomic factors influencing growth prospects for the global economy. The US-North Korea tension 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 unrest in the Middle East following the US policy-biased towards Israel laid another geopolitical risk in the list weighing down on the world growth prospect. Meanwhile, the immigration issues across the world continue to exert pressure on economic growth, particularly in the euro area.


Notwithstanding the downside risks to the global growth, Malaysia stands to benefit significantly from the improvement in the world trade activities against the backdrop of a better global growth. For the first eleven months of last year, both exports and imports recorded a double-digit average growth of 20.7% and 21.6%, respectively, resulting in a total trade surplus of RM89.9 billion. Although import growth outpaced export growth, the import components are tilted towards capital and intermediate goods as opposed to consumption goods, which is good for the current as well as for the future production capacity.


The demand from Malaysia's top trading partners continued to be strong as their economies are growing healthily. The top five Malaysia's trading partners representing 55.7% total trade values for the period January-November, 2017 were China, Singapore, the European Union, the USA and Japan (according to the descending order). Most of these economies grew better than expected last year and are expected to persist into this year


Oil prices are expected to average higher this year as compared to last year as a result of growing demand, consented production cuts among OPEC supported by other amjor producing countries and stabilizing US shale production. The average crude oil prices for this year is expected to rise by 4.6% after a 25.5% leap in 2017. The 2017 Brent crude oil prices averaged out at US$53.55 per barrel and expected to increase to average out higher at US$56 per barrel (2016: US$42.67).


The World Bank agriculture prices indices (there categories: beverages, food and raw materials) are expected to inch up this year as compared to last year due to reduced supplies. Within the food category, prices for oils and meals as well as grains are expected to rise marginally. Nevertheless, palm oil (crude palm oil - CPO) prices are expected to average out lower this year at a range of RM2,600 - RM2,700 per metric tonne as compared to an average price of RM2,783 last year, due to both supply and demand factors. Palm oil production is expected to improve this year due to good harvest as the El-Nino effect is over. Total CPO production for this year is estimated to exceed 20.5 million tonnes against last year production of 19.9 million tonnes. Meanwhile, the demand for palm oil products is expected to shrink this year, notably due to India's hike on import tariff for edible oils, from 30% to 15%, and European Union intention to ban biofuels made from vegetable oils, including palm oil. Nevertheless, China's decision to lower average import tariff on consumer goods from 17.3% to 7.7% will somewhat elevate demand for palm oil products from Malaysia.


With an accommodating domestic development amid buoyant external demand, Malaysian economy is expected to grow at 5.4% this year, again driven by domestic demand, which in turn is projected to grow at 5.2%. The private sector, both consumers and producers, is anticipated to continually provide impetus for domestic demand. The external sector is expected to remain strong although the growth rates both for exports and imports are projected lower due to the base effect of a high growth realised last year. The growth momentum is expected to persist into next year, with the expected GDP growth rate in a range of 4.8-5.3%. On the supply side, all sectors are expected to register positive growth for this year but moderating as compared to last year, except for the mining and quarrying sector. Meanwhile, the headline consumer inflation for 2017 is estimated to be 3.8% and moderating to 3.5% this year. The unemployment is estimated to average out at 3.5% for 2017 and moderating to 3.4% for this year.


Posted by suzy at 12:31 PM on January 23, 2018






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