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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