MALAYSIAN ECONOMIC OUTLOOK
In the opening of the year, there was an excitement of hopeful and cheerful sentiments for better global economic performance. However, as the year progress, the prospects somewhat dwindles. The first quarter results for some economic indicators, particularly on external trade, are not very promising. Total gross exports continued to grow slowly for the first five months of this year registering an average growth of 1.0%, as compared to the average growth of 1.9% in 2015 and 6.3% in 2014. The first quarter balance on the current account of the balance of payments recorded a lower surplus of RM5.0 billion as compared to a surplus of RM11.3 billion at the same quarter of last year.
Meanwhile, the historic event of Brexit has generated more uncertainties in the global stage. Repercussions on financial conditions and overall market sentiment may have bearing on the already lacklustre growth of the euro area. In addition, the Brexit impact on other major world economies is not very certain, especially its policy implications. For instance, regarding the timing of normalization in the monetary policy in the US and on the speed of rebalancing in China.
The issue of lower crude oil prices seems to be adapted by many after two years of creating havoc in the global economy. Oil prices were hovering around USD45-49 per barrel in the second quarter, almost touching the psychological level of USD50. Prices have shown sign of improvement despite OPEC countries fail to reach any consensus due to differences in national interest among member countries. Thanks to unexpectedly lower oil production, to a certain extent, from some non-OPEC countries. Total oilrig counts have decreased tremendously for the past two years, implying lower world oil production. The world total of oilrigs for the second quarter of 2016 was 35.1% lower than the same quarter of last year, which in turn, was 36.0% lower than the second quarter of 2014. Meanwhile, total oilrig counts in the Middle East for the second quarter of this year declined by only 3.7% from the second quarter of last year. Therefore, OPEC policy of maintaining its market share seems not very effective to push prices up, pointing to the weak demand conditions that could be the probable reason.
International Monetary Fund (IMF) in its July 2016 World Economic Outlook (WEO) has revised the world output growth for 2016 downward by another 0.1 percentage points to 3.1%, following a previous downward revision of 0.2 percentage points in April 2016. These two downward revisions in a row reflect a gloomy picture of the world economy. Likewise, IMF has revised downward its projection on world trade volume by 0.4 percentage points to register an annual growth of 2.9% in the second quarter of 2016. Nevertheless, IMF maintains its projection on output growth for the ASEAN 5 (Malaysia, Indonesia, Philippines, Thailand and Vietnam) - a silver streak in gloomy clouds.
On the domestic front, domestic demand is expected to continue to be the engine of growth for the Malaysian economy for this year. Global economic growth fails to gain momentum as recoveries for some economies are still fragile. Weakened global trade and capital flows persist. Lower commodity prices remain a stumbling block for the growth of developing economies, which in turn, slows down the developed economies. Meanwhile, political upheavals in some countries influenced business sentiments around the world. For instance, the recent Brexit sparks uncertainty within the EU.
The liquidity condition was tight for the past one year or so due to tighter monetary policy as household debts were increasing. Moreover, short-term capital recorded a net outflow last year in searching for growth prospects, particularly in the US coupled with some negative sentiment at home. Despite a moderation in consumer spending, inflation rates were a bit high for the first two months of 2016 partly due to cheaper ringgit, but declining ever since registering the rates in the range of 2.0 - 2.6%. BNM appeared to tighten up money supply in March and April this year as inflation rates were creeping up at the beginning of the year. Nevertheless, BNM eased up the money supply in May as inflation rates started decelerating in the second quarter. The recent cut in OPR by 25 basis points is expected to further improve the liquidity situation in the economy. Domestic demand is expected to increase in favour of private consumption.
Notwithstanding weaker external demand, MIER's latest survey results are slightly upbeat for consumers and businesses. Consumer Sentiments Index (CSI) slightly increased as compared to the previous quarter as well as to the same quarter a year ago, although consumer confidence level remains low as CSI is still below the demarcation level of 100 points. Business Conditions Index (BCI) gained 13.6 points quarter-on-quarter, to settle at 106.4 points, surpassing the 100-point threshold, an indication that manufacturing activities are rebounded. Although the overall global trade is expected to be moderated further, the near-term demand for traditional Malaysia's exports is still healthy as shown in the surge of the "new export orders index". This is in line with the increase in the IPI for May 2016. Nevertheless, the longer-term expectation is weakened as indicated by the tapering in the change of expected index (1Q2016: +23.4 points; 2Q2016: +3.1 points), as the downside risks of the global growth are lurking.
Malaysia's real GDP growth for 2016 is maintained at 4.2%, although global prospects are not encouraging. The shortcoming is expected to be compensated by better domestic demand as a result of an expansionary monetary policy. Growth will be driven largely by private sector expenditures as liquidity condition improves. The 2016 domestic demand growth have been revised upward by 0.1 percentage points from our April 2016 projection of 4.5%, as a result of an improvement in private consumption. Meanwhile, private investment growth is revised marginally downward by 0.1 percentage points from our April 2016 projection. 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: 1.3%), mostly anticipated for intermediate and capital goods, which is good for future production and exports.
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 maintained at 3.0%, although the second quarter rates have moderated, in anticipation of higher consumer spending in the second half of the year. Inflation is expected to ease up a bit in 2017.
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