Executive Summary

The Malaysian economy performed better than expected in the first quarter of 2017. Real GDP grew by 5.6%, year-on-year basis (y-o-y). Compared to last year, the growth for the first quarter was 4.1% and the growth for the whole year was 4.2%. The first quarter growth was primarily driven by domestic demand, which was growing by 7.7% y-o-y, underpinned by strong growth in both consumption and investment. Private consumption continued to grow at a faster pace (6.6%), while public spending rebounded strongly (7.5%) from a negative growth in the fourth quarter of last year. Meanwhile, investment was dominated by the private sector with a double digit growth (12.9%). Similar to public consumption, public investment also rebounded strongly growing at 3.2%, a turnaround from a decreasing tone for the last two years.

The external sector was busy from the beginning of the year, after being relatively quiet for the past year. Both exports and imports grew by double digits every month for the first five months of this year, attributed to the improvement in the world trade flows. Looking back a double-digit growth was never recorded, neither for imports nor exports in any month of last year. The IMF projected that world trade volume to grow at 3.8% y-o-y as compared to a weaker growth of 2.2% last year. The growth is primarily due to better demand from major and emerging economies as well as from commodity-exporting economies as prices for most commodities improved.

The monthly trade balance for the first half of this year remained in surplus but there is no quantum change in terms of values, as both exports and imports are growing concurrently. As a matter of fact, import growth is consistently higher than export growth for every month. For the first quarter of 2017, gross exports grew substantially by an average of 21.4% as compared to the same quarter of the previous year. Whereas, gross imports grew at a stronger rate of 27.7%. Consequently, the external sector did not contribute significantly to the first quarter GDP growth. The percentage share of net exports of goods and services to the real GDP for the first quarter of 2017 was only 6.5%, as compared to 8.4% share for last year. Meanwhile, the share of domestic demand to the GDP for the same period was 92.8%. Gain in exports contributed largely by three major products, namely electrical and electronic (E&E), palm oil & palm oil-based products and refined petroleum products. These products representing a slightly more than half share of total exports. In May, they contributed to 52.0% share of total exports. The demand for E&E products continued to be strong, thanks to the resilient consumer spending in the US amid strong job growth and a stronger dollar. Palm oil & palm oil-based products are enjoying better prices, although declining, and good post-El Nino harvest amid robust global demand.

Notwithstanding that imports are growing faster than exports, it will benefit the economy in the medium to longer run. Imports were dominated by intermediate goods representing about half of total imports. The remaining half of total imports is split between capital and consumption goods. Capital goods are important for capacity expansion. High growth in capital goods will contribute to capital accumulation or investment in the economy. This is good for a long-term growth potential. Growth in intermediate goods, in turn, is good for a medium-term growth prospect as intermediate goods are used for making final goods, which are mostly for the export markets. Imports of capital goods grew by 42.0% a year in the first quarter of 2017 and imports of intermediate goods grew by 27.8%. Imports of consumption goods, on the other hand, grew by only 4.0%.

Better-than-expected growth in the first half of 2017 exerts positive sentiments about the economy, reflected by several indicators. Among others, the domestic financial market recorded positive inflows of portfolio investment for April and May. Apart from good first quarter performance, the portfolio inflows also resulted from measures to develop the domestic financial market. Given the development in the financial market, ringgit rallied strongly against the USD from the beginning of the 2Q2017. Ringgit emerged as the best performing currency in the region in May, appreciating by 1.7% against the USD. For the whole of 2017 until May, ringgit has appreciated by 4.9%.

The second quarter survey result of MIER's Business Conditions Index (BCI) also revealed that in general businesses are still optimistic about the economy as the index is above the demarcation level of 100-point threshold of optimism. On y-o-y basis, the second quarter of 2017 BCI increased by 7.2% compared to the same quarter of last year. The peculiarity of the 2Q2017 BCI is that the current and domestic-related indices improved over the previous quarter, however, the expected and export-oriented indices worsened during the same period. It shows that businesses are still pessimistic about the near-term prospect as well as on the export demand, although they are upbeat about the current development particularly on the domestic market. Businesses are observed to be very cautious about external development and putting more weight on domestic market. From consumer point of view, the confidence level continues to improve but consumers remained cautious as the second quarter MIER's Consumer Sentiments Index (CSI) increased but remained below the demarcation level of 100 points. The survey results revealed that consumers' current incomes continued to improve and they are more optimistic about their future incomes as well as on the employment outlook. However, consumer spending plans take a breather as the confidence remains weak.

On the global stage, growth momentum continues. The International Monetary Fund (IMF) forecasted that the world economy will grow by 3.5% this year as compared to 3.1% in 2016, underpinned by the recovery in manufacturing and trade, stronger investment activities and buoyant financial markets. The acceleration in economic activities in the commodity exporting countries due to better commodity prices provide additional impetus to the world economy. The advanced economies as a group is forecasted to grow at 2.0% in both 2017 and 2018. The US economy continues to grow healthily, driven by solid consumption growth underpinned by expansionary fiscal policy. The recovery in the euro area is expected to be moderate supported by a somewhat expansionary fiscal stance, accommodative financial conditions, a weaker euro and beneficial spillovers from the US fiscal stimulus. The growth prospect is held back by political uncertainty in addition to economic issues of weak productivity, adverse demographics, and public and private debt overhang in some countries. Japan performed better than anticipated due to the surprisingly improved net exports in 2016, and is expected to continue in 2017, as a result of a weaker yen. Nevertheless, the Japanese growth prospect is hampered by a limited room for fiscal stimulus as tax revenues weakened and narrowing output gap as the economy is running close to full capacity since the global financial crisis of 2008. China is expected to pose stronger than expected growth momentum supported by expansionary policies, especially on public investments and strong credit growth. China's rebalancing effort continues as there seems to be a decline in its current account surplus as import demand surged. Crude oil continues to provide excitement to the world economy. Crude oil prices are expected to average out at USD55 per barrel in 2017, but currently hovering about USD50. OPEC's accord to restrict production to 32.5 million bpd had lifted prices temporarily in the beginning of the year. Non-OPEC members not in the pact as well as the exempted OPEC members are pumping additional volumes taking advantage of rising prices; exerting a downward pressure on prices.

Taking into consideration the current development in the world economy as well as on the domestic front, Malaysian economy is projected to grow at 4.8% this year, an upward revision by 0.3 percentage point from MIER April's forecast. The growth is driven primarily by domestic demand and reinforced by stronger external demand. Domestic demand is expected to grow by 4.6% (0.1 percentage point upward revision from our April forecast). Private consumption is expected to grow faster at 6.0% (0.2 percentage point upward revision). The growth projections for public consumption and gross fixed capital formation are maintained at 1.0% and 3.7%, respectively. The growth in exports of goods and services as well as the growth in imports for this year are maintained at 1.8% and 1.5%, respectively from our last forecast. The contribution of both domestic demand and external demand to the GDP growth projection for 2017, however, is higher from our earlier forecast due to the base effect as DOSM has revised the preliminary 2016 data for GDP and its components.

The growth projection for 2018 is maintained at 4.7 - 5.3%. Current account balances for this year as well as for 2018 are revised downward, estimated to be 1.8% and 1.6% of GNI, respectively. Lower current account balance, in turn, attributable to lower balances on goods account from our April forecast considering the current trend on strong imports of goods. This is also supported by weak expectation on export orders by businesses as indicated by the second quarter BCI.

Posted by suzy at 11:09 AM on July 26, 2017


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