INSTITUT PENYELIDIKAN EKONOMI MALAYSIA (149064-U)

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MALAYSIAN ECONOMIC OUTLOOK


MEO1Q2017


Executive Summary



The global economy is on the recovery path after bottoming out last year. Better-than-expected performance in major economies, particularly the United States, China, Japan and euro area, and the recovery of larger emerging and low income economies as commodities prices improved provided the impetus for global growth. A balanced policy mix, fiscal stimulus for infrastructure development as well as for defence and security expenses and gradual monetary normalization, provide a positive growth environment for the US although it is weighed down by uncertainties in the Trump administration. Fiscal stimulus in China and accommodative monetary policy in euro area and Japan further boosted global demand.



Demand from commodity-exporting economies rebounded as prices for c vmajor commodities continue to improve. Crude oil prices stabilized above US$50 per barrel, although the tug-of-war on production between OPEC and US unconventional oil producers persists. OPEC together with a few major non-OPEC bigger producers have agreed on production quota and therefore effectively exert an upward pressure on prices. On the hand, better prices coupled with an improved in production efficiency among American shale oil producers as well as higher production from other small oil producing countries to boost up revenues and consequently pressuring the prices downwards. Prices are expected to average at US$55 per barrel for this year given the current supply condition on the back of a better expected global demand.

Prices for major agriculture commodities are improving with the exception of grains, particularly wheat, maize and rice. Grains prices are expected to decline due to bounty crops in Europe, North America and Central Asia following favourable weather conditions. Oils and meals prices, on the other hand, are expected to rise by 3.0%. Palm oil yields are anticipated to be lower due to adverse weather conditions, particularly in East Asia caused by El Nino. Supply is expected to continue to fall short of demand, pushing up prices of oilseeds and vegetable oils in 2017. Prices for agriculture raw materials components including rubber are expected to rise by 2.0%, among others due to a pickup in demand as most economies are improving.

Faster growth among major developed and larger emerging and low income economies outweigh slower growth of some larger economies like India, Brazil, Mexico, Argentina and Turkey. Global demand is expected to improve. Meanwhile the IMF projected that world trade volume for this year to grow stronger at 3.8% and further improve to 4.1% next year as compared to a slower growth of 1.9% last year. Nevertheless, political and policy uncertainties among major economies and pockets of geopolitical conflicts here and there are potential headwinds to the global growth. The rise of protectionism among some major developed economies will hamper on trade and immigration flows and this in turn will have implication on production and income growth for some major economies. Protectionism policy will also invite retaliation from other countries. All in all, Malaysia is expected to benefit from stronger demand from major trading partners.

As external demand strengthened, exports of goods and services for this year is expected to grow at 1.8% per annum, an upward revision of 0.5 percentage point from our earlier forecast. Nevertheless, growth in imports is maintained at 1.5%. Consequently, net exports of goods and services is expected to grow at 4.1%. MIER's first quarter 2017 survey on business sentiments (Business Conditions Index - BCI) revealed that businesses are particularly buoyant about external demand as both sub-indices for new export orders and expected export sales increased by 72.3% and 100.0%, respectively as compared to the previous quarter. On a y-o-y basis, new export orders increased by 138.0% and expected export sales increased by 100.0%. This sentiment also concurs with the first quarter 2017 Vistage-MIER CEO Confidence Index in which CEOs are generally hopeful for the short-term prospects for their firms as indices for expected employment, revenue, profit and fixed investment surged as compared to the previous quarter as well as against the same quarter a year ago.

Domestic demand contributed to 91.6% of real GDP for 2015 and 91.8% for 2016 and the trend is expected to continue for the next two years. Therefore, the growth in domestic demand is the main source of GDP growth. For 2016, 4.0 percentage points of the 4.2% GDP growth, or about 95%, was contributed by domestic demand and a similar trend is expected for 2017. The growth in domestic demand in 2016 was slower at 4.4%, the lowest since 2008/2009 world financial crisis. The growth in domestic demand is expected to marginally improve to 4.5% for this year and rebound slightly to 4.9% in 2018.

Growth in domestic demand for this year is supported by robust growth in private expenditures. Private consumption is projected to grow at 5.8%, a bit slower than last year's growth of 6.1% as consumers are more cautious on the back of rising household debt and prices. This is notwithstanding an improvement in consumer confidence level as reflected in MIER's latest survey on consumer confidence, the first quarter 2017 Consumer Sentiments Index (CSI). The CSI bottomed out in the fourth quarter of 2016 but consumer confidence remains weak as CSI continues to be below the demarcation level of 100 points. However, consumer confidence level is improving as the first quarter 2017, the CSI rebounded to 76.6 points as compared to 69.8 points in the previous quarter, and still above the same quarter of last year (1Q2016: 72.9 points). It shows that in general consumers are more optimistic about the economy. As their confidence level is improving, consumers indicated cautiously ambitious spending plans.

An upward pressure on prices poses a setback to consumption growth. Higher crude oil prices and a depreciated ringgit will contribute towards a higher cost-push inflation expectation. Headline consumer inflation for this year is projected to be 3.0%, a 0.5 percentage point revision from January's forecast, and is expected to moderate to 2.7% in 2018. Meanwhile, public consumption is projected to grow by 1.0%, the same rate as last year. Government is anticipated to continue with its objective of reducing fiscal deficit to 3.0% of GDP this year.

Investment is projected to grow faster led by the private sector. Gross fixed capital formation is projected to grow by 3.7% in 2017 as compared to a slower growth of 2.7% last year. Private investment is anticipated to grow by 4.7% this year, 0.3 percentage point better than last year. The MIER's first quarter 2017 BCI revealed that businesses are more enthusiastic about the economy. BCI rebounded by 31.5 points (38.8% increment) as compared to the previous quarter surpassing the 100-point threshold of optimism. On y-o-y basis, the first quarter 2017 BCI increased by 21.3% compared to the same quarter of last year. The expected index increased significantly by 73.2% from the previous quarter or 19.6% y-o-y shows that while businesses are optimistic about the current business condition they are more upbeat about future expectation. All sub-indices, including sales, production, capital investment, capacity utilization and expected production registered an increment as compared to the fourth quarter of last year as well as on annual basis. Capacity utilization rate surged to 86.6% as compared to 76.5% in the last quarter and 76.4% in the same quarter last year. The first quarter 2017 Vistage-MIER CEO Confidence Index also revealed that CEOs are more likely to increase their investment as the sub-index for planned fixed investment increased by 14.3% y-o-y. Furthermore, import of capital account in 2016 recorded a 4.9% y-o-y increment indicates capacity expansion plans among businesses. Meanwhile public investment is expected to grow by 1.6% this year supporting government continued capacity expansion plan, particularly for important infrastructure projects.

Bank Negara Malaysia (BNM) is expected to continue pursuing an accommodative monetary policy favouring businesses as household debts are creeping up. The expansionary monetary policy is expected to continue this year since the price level is kept under control to complement the expansionary fiscal policy. The government continues to pursue an expansionary fiscal measures to boost private consumption, mostly through transfer payments.

MIER projected that real GDP for 2017 will grow at 4.5%. The growth will continually be driven by domestic demand, particularly by private expenditures. However, external demand is expected to be stronger, ending overdependence on domestic demand. The growth momentum is expected to intensify into 2018 the expected growth of 4.7 - 5.3%. Current account balances for this year as well as for 2018 are expected to improve, owing to a better commodity prices and stronger external demand, estimated to be 2.0% and 2.4% of GNI respectively.


Posted by suzy at 11:40 AM