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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