The Thirteen General Election (GE13) results make strategic reform initiatives (SRIs) more challenging. More importantly, a weak external environment poses tough challenges, especially for the fiscal consolidation process while the shrinking current account of the balance of payments adds a new dimension to macro policy management. Financial stability needs to be preserved, as risks are building up, especially with high level of household debt and increasing federally-guaranteed debt of Government-linked companies (GLCs). Small adverse external shocks may amplify domestic financial risk, leading to instability and affecting the growth trajectory. As such, comprehensive structural reforms and institutional improvements, through further reducing market rigidities and imperfections, especially in the labour market are the keys to ensure sustainable long-term growth, high quality jobs and better standard of living and welfare of the rakyat.
The pace of growth in the first quarter of 2013 moderated to 4.1% (4Q 2012: 6.5%, 1Q 2012: 5.1%), on account of continued contraction in the external sector and, surprisingly decelerating private investment. Nonetheless, private consumption remained robust, providing the necessary support for aggregate domestic demand. Low interest rate environment and generally high domestic liquidity did not fully translate into strong private investment activity in the first quarter of 2013. Net private sector financing was lower and fund raising activity moderated in the first quarter of 2013. Of significance, short-term external debt is on the rise, especially by the banking sector, pointing to tightening financial conditions.
Global growth remains weak and forecasts have been downgraded, especially in the euro area where growth is forecast to be -0.6% in 2013 and 0.9% in 2014. Growth forecasts for the United States and Japan are also lower at 1.7% and 2.0%, respectively in 2013. While growth in the United States is forecast to climb higher to 2.7% in 2014, growth in Japan, however, is projected to decelerate to 1.2%, despite its accommodative macroeconomic policies. Growth rates in emerging market and developing economies have also been revised down, following slower external demand and continuing lower prices of commodities. Global growth has been revised down to 3.1% in 2013 and 3.8% in 2014, pointing to a weaker global environment.
In addition, volatilities in the financial markets have increased in recent months, as manifested by currency depreciation, declining equity prices, rising Government bond yields and inflationary pressures. Credit costs are expected to rise from the current low base. The IMF, in its WEO (World Economic Outlook) Update on 9 July 2013 cautioned that many emerging market and developing economies face a trade-off, in terms of the need to support weak economic activity and more importantly, to contain increasing capital outflows.
Headline inflation is also creeping up, rising persistently from the lowest of 1.2% in December 2012 to 1.8% in June 2013, attributed mainly to higher food prices. Core inflation, however, remained below 1.0%, indicating that demand pull-inflation is still benign, especially with increasing negative output gap and continuing stable labor market conditions. Bank Negara kept the Overnight Policy Rate (OPR) unchanged at 3.0% at its Monetary Policy Committee Meeting on 11 July 2013, representing a record 13th straight meeting since July 2011. The move is in line with the need to support growth in view of weaker global environment and generally benign inflation.
The results of MIER's second quarter Consumer Sentiments Survey and Business Conditions Survey show that consumer and business confidence indices move in opposite directions again. While the second quarter 2013 Consumer Sentiments Index declined sharply by 13.2 points quarter-on-quarter to settle lower at 109.7 points, the Business Conditions Index gained strongly by 21.6 points to settle above the 100-point threshold at 114.2 points in the second quarter of 2013, indicating generally improved business confidence
Taking into account the uncertain external environment, emerging weakness in MIER's CSI, but somewhat improved BCI and generally poor performance of Malaysia's key macroeconomic indicators, domestic demand is expected to moderate slightly in 2013. However, domestic demand will still continue powering growth of the Malaysian economy. We are revising down our 2013 growth forecast of previously 5.6% to 4.8% for 2013. Growth outlook for 2014 is projected to be between 5.0 - 5.5%, on account of weak global economic outlook, generally tight fiscal and financial conditions and enhanced downside risks.
Posted by suzy at 12:09 PM