Executive Summary

After performing better than expected last year growing at 5.9% a year, the Malaysian economy is expected to grow at a slower pace this year as well as next year, putting less stress on the domestic demand. The interim data so far are pointing towards slower growth than earlier anticipated. The first quarter GDP grew at 5.4% and further moderated to 4.5% in the second quarter. The latest trade data reflected the sign of a weakened global demand. The August trade balance was the lowest since November 2014 at RM1.6 billion. This is consistent with the declining index of the export-oriented industries in the IPI since the beginning of the year.

The better-than-expected global growth last year is finally come to an end. All signs are pointing to a weakening global demand as the world economy has settled into a slower pace of growth. Global demand is disrupted by the renewed protectionist sentiment. The heightened US-China trade war instils the fear of uncertainty in many economies including Malaysia. A reduction in China's exports to the US is expected to have a significant knock-on effect on Malaysia's export demand. Malaysia is expected to be severely affected, only second to Taiwan. Many China's exported goods to the US contain Malaysia's components, especially for the electrical and electronic products.

Production disruption is already felt in many economies reflected in production indices. Malaysia's latest Industrial Production Index (IPI) recorded a decline in the manufacturing index of the export-oriented industries. Likewise, the Markit's global Purchasing Managers' Index (PMI) fell for the past five months. The new export orders of the global PMI fell to the lowest since May 2016 pointing to a weakening world trade. The PMI for Emerging Asia shows that the manufacturing sector is losing momentum as the new export orders weakened.

Malaysia's growth continues to be driven by domestic demand, which in turn is dominated by private consumption. Nevertheless, the continued reliance on private consumption to spearhead growth doesn't augur well with the slowdown in investment activities. The BOP account shows that FDI for the first half of the year was about half of the level of the same period last year. The overall investment growth for this year, private and public, is expected to moderate. This is partly due to the government policy to review on the selected big-ticket investments in the effort to address the issue of high public debt. This has a spill-over effect on private investment, which in turn will have a negative influence on private consumption. Meanwhile, the portfolio investment in the BOP account recorded a substantial negative balance of RM40.9 billion in the first half of 2018. This will exert a downward pressure on the value of ringgit, which in turn influencing negatively on domestic production and consumption. The ringgit-USD exchange rate is on the rising trend (ringgit is weakened against USD) since the beginning of the year. For this year to date, ringgit has lost close to 7.0% of its value against USD compared to its peak in the first quarter.

Against the backdrop of a moderation in global demand and overreliance on private consumption amid the weakened investment activities to steer growth, we expect that GDP will grow at a slower pace. The GDP growth is revised downward by 0.8 percentage point to 4.7% from our earlier forecast of 5.5%. The slow pace of GDP growth is expected to persist into next year, in the range of 4.5-5.5%. Domestic demand continues to drive growth and it is expected to grow at 5.5%, slower than last year's growth of 6.5%, underpinned by a robust growth in private consumption, though moderating, compensating a moderation in public consumption. The modest growth in public consumption is partly due the government policy on cautious spending in the effort to address the issue of high public debt and simultaneously with the reduced revenue without goods and services tax (GST).

Our survey data also indicate that consumers are less optimistic on their perception on the economy as compared to the previous quarter. After recorded the highest reading in 20 years in the second quarter of this year, the third quarter's MIER Consumer Sentiments Index (CSI) slipped by 25.4 points from the last quarter. Nevertheless, the index is still above the demarcation level of 100 points threshold of optimism (107.5), although failed to maintain the level of optimism of the previous quarter (132.9 points). Consumers still indicated steady spending plans but more selective. Notwithstanding a downbeat sentiment as compared to the previous quarter, consumers are still optimistic compared to the same quarter of last year pertaining to their current incomes, expected incomes and employment outlook.

Consistent with the interim data on several economic variables thus far, the third quarter MIER's Business Conditions Index (BCI) is also pointing to a slower growth ahead. The third quarter index slipped by 7.5 points from the previous quarter but 5.8 points better than the same quarter of last year (2Q2018: 116.3 points; 3Q2018: 108.8 points). Businesses are still optimistic about the current situation as the current index improved from the previous quarter (2Q2018: 110.2 points; 3Q2018: 113.0 points). This is supported by the increase in indices for sales, new domestic orders as well as new export orders (+1.0 point; +9.3 points; +10.0 points, respectively). On the contrary, the production index fell slightly from the previous quarter (2Q2018: 57.7 points; 3Q2018: 53.5 points), in concurrence with the fall in the export-oriented industries index of the IPI.

Unlike the current index, the expected index for the third quarter fell significantly by 38.2 points as compared to the previous quarter (2Q2018: 134.7 points; 3Q2018: 96.5 points). The index slipped into a below the demarcation level of 100-point threshold of optimism. This is consistent with the expectation of a slower pace of global growth. A fall in the expected index is attributed to the fall in all the expected sub-indices, namely expected production (-22.8 points) and expected export sales (-15.4 points). The pessimistic business expectation is also revealed by a reduction in the indices for capital investment (-7.2 points) and capacity utilization (-0.5 points) as compared to the previous quarter. Meanwhile, the capacity utilization rate decreased marginally by 0.3 percentage point from the previous quarter (2Q2018: 82.8%; 3Q2018: 83.1%).

There are more signs are pointing towards a soften Malaysia's external demand. MIER analysis shows that exports demand is expected to grow at a slower pace of 1.4% (2017: 9.4%) as compared to the growth in imports at 2.0% (2017: 10.9%). Above all, the overall slowdown in global demand is directly influencing Malaysia's export demand. The slower pace of growth in developed economies is directly reducing their demand for the manufactured goods. The world demand for commodity from Malaysia is also expected to go down. For the agriculture commodities, particularly the palm oil and palm oil-based products, the demand is expected to decrease due to both a reduction in volume coupled with cheaper prices.

The exports for petroleum products are expected to shrink due to a weaker demand for energy, as production subsided coupled with the rising prices. Lower quantity demanded for petroleum products cancelled out the gain of rising prices, if any. The price of crude oil (Brent) registered a four-year high in the first week of October, reaching an 85-dollar mark. The rise in crude oil prices is due to supply worries as the second round of US sanctions on Iranian oil is approaching and lower US crude and gasoline stocks. The worry over supply seems to outweigh OPEC's output rise despite a reduction in Iranian and Venezuela outputs. The largest increase in OPEC's production in September came from Libya, Angola, Nigeria and Saudi Arabia. Nevertheless, crude prices is expected to ease up next year on the back a slowdown in global demand. Oil import demand from oil importing countries are expected to slow down, including from China and India. The Brent price is anticipated to ease up to a below USD80 mark towards the end of the year and further slip to the range of USD60-70 next year.

Current account (CA) is expected to remain in surplus for this year but tapering to a below RM30 billion mark (2017: 40.3 billion). This is due to a decreasing balance in the goods account as the global demand moderated. For the first eight months of this year, total trade balance in goods was RM70.4 billion, which is below the trend for last year (2017 goods balance: RM116.8 billion). Meanwhile, the deficits in the services account, as well as in the primary and secondary accounts, are not expected to improve. Therefore, there is a concern on the ability of the economy to maintain a healthy CA surplus.

Although the headline inflation for this year was expected to be moderate in the first place, it turned out to be well below than expected. The headline inflation averaging out at 1.3% for the first eight months of the year. Thanks to cheaper foods and transportation prices despite higher oil prices and cheaper ringgit. With the revealed data so far, the headline inflation projection is revised downward from MIER earlier forecast of 2.0% to the average rate ranging from 1.4%.

Posted by kala at 03:10 PM on October 16, 2018


Executive Summary

The Malaysian economy is expected to grow at a moderate pace for this year as well as for the next year after recording better-than expected growth last year. Real GDP is projected to grow at 5.5% year-on-year (y-o-y) this year and is expected to further moderate to a range of 4.8 - 5.3% next year, after recording 5.9% growth last year. Domestic demand continues to be the engine of growth, growing by 5.8% y-o-y, and further reinforced by upbeat export demand. The growth in domestic demand, in turn, is largely attributed to private consumption. While, public spending as well as investment growth for this year, private and public, is expected to moderate. This is partly due to the government commitment to address the issue of high public debt amid a reduction in revenues causing by the decision to zero-rate goods and services tax (GST). The new elected government has also decided to review selected big-ticket investments in its effort to reduce public debt.

Domestic demand is expected to contribute 5.3 percentage points (ppt) to the 5.5% projected GDP growth for this year, while the contribution of net exports is only 0.14 ppt. Private consumption, being the largest share of GDP estimated at 54.7%, is expected to contribute strongly to the GDP growth (4.0 ppt out of 5.5%), thanks to a stable job market and a sound wage growth. Unemployment rate remains favourable, projected to be flat at 3.4% for this year.

The consumption-related downside risks to the forecast are eminent due to the importance of private consumption in propelling GDP growth. We estimate that GDP will grow slower by 1.0 ppt for a 1.0 ppt reduction in the growth of private consumption. For this year, private consumption is projected to grow by 7.4%, 0.4 percentage point faster than last year, riding on good growth of employment and wages in the midst of buoyant consumer sentiments. The median salaries and wages for the lower-end employees (people without formal education and primary education) grew at faster rates (13.6% and 14.9%, respectively) for the past two years as compared to other groups of employees. This trend will boost aggregate spending as the elasticity of spending with respect to income is generally higher among lower-income workers.

The MIER Consumer Sentiments Index (CSI) survey shows that consumers are finally upbeat about the economy after being in the doldrums for the past four years. The second quarter's (2Q2018) CSI rebounded way above the demarcation level of 100 points threshold of optimism to register 132.9 points, which is the highest in 20 years that is since 2Q1997. The survey also revealed that consumers are having ambitious spending plans especially for consumer durables. This is underpinned by the improved consumers' current incomes as well as future incomes and favourable employment outlook as shown by the survey results.

Total capital investment is expected to grow at a slower pace of 4.9% this year as compared to 6.2% last year due to a moderation in private investment coupled with a deceleration in public counterpart. Private investment growth is expected to moderate to 7.5% this year from 9.3% last year, while public investment is expected to shrink by 0.7% as compared to a marginal increment of 0.1% last year. A reduction in public investment somewhat drives down private investment as well as private spending. Nevertheless, the growth in private investment is expected to be sufficient to cater for the rise in demand, both from domestic and from across the borders.

Consistent with CSI, businesses are also upbeat about the economy. The 2Q2018 MIER's Business Conditions Index (BCI) rebounded strongly recording the highest level over the last 13 quarters, surpassing the demarcation level of 100-point threshold of optimism. Businesses are bullish about the current business as well as about future business conditions. The improvement in the current index is consistent with the previous quarter result which shown that the expected index rose above 100 points despite the pessimistic sentiment about the current business condition in the first quarter. Therefore, the result reemphasized that the expected index serves as a good leading indicator for a quarter ahead. All sub-indices for the second quarter - namely sales, production, new domestic orders, new export orders, capital investment, capacity utilization, expected production and expected export sales - rose over their corresponding readings in the previous quarter.

The production index rose remarkably by 46.1% over the previous quarter. Both domestic and export orders improved as compared to the previous quarter. This is a turnaround for the domestic business, from being pessimistic in the first quarter to becoming more optimistic in the second quarter. This is also in agreement with the survey results for CSI for this quarter, which shows that consumers are having ambitious spending plans especially for consumer durables. The survey results also showed an improvement in business capacity utilization in the second quarter to support the rise in sales. The capacity utilization rate is 83.1%, as compared to 80.0% for the previous quarter.

Riding on the better-than-expected growth in some major economies last year, the external sector is expected to continue to be buoyant this year. The growth is underpinned by faster growth in the advanced economies coupled with a sustained growth in the emerging market and developing economies (EMDE). According to the IMF, the world economy is expected to grow at 3.9% for this year as well as for the next year, 0.1 percentage point better than last year. The growth is broadly reinforced by a favourable progress in the global trade and investment supported by an expansionary aggregate fiscal position and accommodative monetary stances in the advanced economies. The positive effect of the US tax reform is expected to persist for the next couple of years before subsiding. The monetary stances are mixed, remained very accommodative in the euro area and Japan but faster normalization of the policy rate is expected in the US on the back of stronger demand and inflation pressure as a result of expansionary fiscal policy.

Given the upbeat global economy, IMF projected that the growth in world trade volume for this year will improve to 5.1% from 4.9% last year but moderating to 4.7% next year. The gain is mostly attributed to the surge in trade activities for the manufactured goods, particularly due to the global technology upcycle, and better commodity prices particularly for crude oil. The current crude oil prices are hovering around mid US$70s a barrel after briefly hitting US$80 in May. The increase in crude oil prices is attributed to a stronger global demand for energy amid OPEC production cut. This is due to better growth of many major economies, particularly among energy-importing countries. Crude oil prices are expected to averaging out at US$73 per barrel this year.

Notwithstanding a favourable word trade growth, a growing US-China trade war poses a somewhat fuzzy outlook. The risks to Malaysia's external trade thus far are mostly indirect and could be tilted either ways, upside or downside. Of significance, Malaysia could benefit from the increase in demand for palm oil at least in the near term following trade dispute between China and the USA. China's retaliation by imposing an equivalent tariff on US soybean pushed its prices up and subsequently pulled the demand down and substitute away to palm oil instead.

Both export and import growth for this year are expected to moderate to 2.7% and 2.8%, respectively from 9.4% and 10.9%, respectively for last year despite the upbeat external sector. Nevertheless, this is mostly due to the base effect of an exceptionally high growth for the corresponding period last year. Trade balance is expected to remain favourable with higher surplus than last year. However, the deficits in services, primary and secondary accounts are expected to widen. As a result, surplus in the current account is estimated to shrink a little bit. For 2019, exports and imports of goods and services are expected to moderate to 2.2% and 2.4%, respectively, and the surplus in the current account is expected to shrink further.

On the supply side, the services and the manufacturing sectors are expected to remain as the two largest contributors to GDP shares constituting 54.8% and 23.0%, respectively. The two sectors are also projected to be the main contributors to the GDP growth for this year, contributing by 3.3 ppt and 1.3 ppt, respectively. The services sector is expected to grow by 6.0% y-o-y, while the manufacturing sector is expected to grow by 5.5%. The agriculture sector is expected to grow slower at 3.8% this year and 3.1% next year as compared to 7.2% last year. The growth continues to be underpinned by a sustained demand for the palm oil and palm oil related products. The construction sector is expected to moderate to 6.0% from 6.7% last year owing to government decision to review several key infrastructure projects and the slowdown in property development. On the contrary, the mining and quarrying sector is projected to grow faster than last year, thanks to better oil prices amid firming global demand.

The growth prospects this year as well as for the next year depend heavily on a resilient growth in domestic demand and good performances of major developed economies as well as EMDEs. A slowdown in private consumption is the main domestically driven downside risk to the growth. Although sentiments are running high amid positive income and employment prospects, consumers are widely exposed to the downside risk of ringgit exchange rate and the bloated household debts. Meanwhile, political and policy uncertainties influencing global trade and growth are the main globally driven downside risk to the Malaysia's growth prospects. Among others, the newly erupted US-China trade war may have repercussions on global trade and growth and this will definitely have impact on Malaysia, one way or another.

Posted by suzy at 12:22 PM on July 19, 2018


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