INSTITUT PENYELIDIKAN EKONOMI MALAYSIA (149064-U)

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MALAYSIAN ECONOMIC OUTLOOK


MEO1Q2016


Executive Summary




Introduction

This year started with a glimmer hope of global economic recovery after the lacklustre performance of last year. Economies are gathering the broken pieces and trying to put their house in order preparing a trajectory for better recovery this year. All economies in the world are watching each other's moves with full of hope, as the degrees of dependency among the world economies are higher than ever. All in all, this year is expected to be a better year with all the numbers are pointing to a stronger footing recovery. The momentum is expected to continue until next year.



The collapse in oil prices in mid-2014 has shaped the performances of world economy for last year. The supply glut is blamed to be the cause, and subsequent development of a slowdown of many economies further reinforced lacklustre performances of the world economy. The causes of an oil oversupply are still lingering without any clear counter measures taken by bigger producers, particularly from OPEC. Among the causes of production glut are coming from American shale production, Iranian production after the sanction lift-off and the middle-east black market particularly from Iraq and Libya. To exacerbate the problem, some oil producing countries are pumping more volume to compensate for the drop in prices.

Following the historical trend, oil price is negatively correlated with the value of US dollar (USD). Among others, the correlation is due to the fact that oil trading is denominated in USD and US is the biggest world net oil importer. The trend continues, USD appreciated against all world currencies. Meanwhile, the surge in US domestic demand amid its robust economic growth further increase the upward pressure on USD. Robust US economic growth leads to the expectation for a tight monetary policy to come. Therefore, the Federal Reserve (Fed)'s interest rate normalization is in the backdrop of world economies. On the other hand, weak economic growth of Japan and euro area triggered their central banks to favour an easy monetary policy. This monetary policy divergence among major economies influenced world capital flows in favour of the US.

At the same time, the performances of emerging economies, particularly China, are weak. China's economy is heavily driven by external demand, and currently under pressure for rebalancing it by improving its domestic demand. China's National People's Congress, which concluded on March 16 targeting lower growth of 6.5 percent this year as stated by Prime Minister Li Keqiang as 'a relatively painless cure that avoids hard choices between spurring growth and restructuring'.

Such global economic development coupled with pockets of noneconomic geopolitical factors influencing global trade and capital flows. For Malaysia, external demand was weak last year and is expected to continue to be weak this year. China's slower growth is not forthcoming to the Malaysia's external front to add to the already lacklustre euro zone performances and the US Federal Reserves' slowing down policy. Malaysia's net exports declined by 3.7% last year. Inevitably, domestic demand was the engine of growth for 2015. Nevertheless, last year's domestic demand was moderated, grew by 5.1% as compared to 5.9% a year before. Hence real GDP growth was moderated to 5.0% in 2015 as compared to 6.0% in 2014.

The moderation in domestic demand, however, kept the inflation rate in 2015 below the long-run average of 3.0%, despite high inflationary expectation due to ringgit depreciation. Net capital outflows coupled with slower demand for Malaysian exports, as the world economy weakened, pushed down the value of ringgit. Ringgit has remained depreciated since September 2014 until now, by as high as about 20% at one point. Although ringgit is showing a sign of recovery, it is not expected to get to the pre-crisis rate soon or at least to the psychological threshold of RM3.80 per USD, the rate that was pegged on the September 2, 1998 during the Asian financial crisis in 1997/98. Private consumption weakened as liquidity in the economy declined from RM269.9 billion at the end of 2014 to RM205.1 billion at the end of last year, household debts rising and inflationary expectation was high.

Moving forward, domestic demand is expected to continue to be the engine of growth for the Malaysian economy for this year amid still somewhat sluggish global economy. Weak commodity prices remains as a stumbling block for the growth of developing economies, which in turn, slows down the developed economies, hence the IMF has revised its global growth projection for 2016 downward by 0.2 percentage point from earlier projection. Nevertheless, the growth of 3.2% is still marginally above last year's growth of 3.1%. The growth momentum will be picking up and IMF global growth projection for 2017 is higher at 3.5%. According to IMF's World Economic Outlook, April 2016 world trade volumes grew by 2.8% last year and is expected to grow stronger at 3.1% this year and 3.8% in 2017. Consequently, Malaysia's net exports is expected to improve by growing at 1.2% this year (2015: -3.7%).

Although still driving the economy, the domestic demand is expected to moderate further this year. The surge in private and public investment is much needed to offset the dwindling both private and public consumption. Domestic demand is expected to grow by 4.5% slower than last year with the growth of 5.1%, underpinned by private investment growth of 5.6% and private consumption growth of 5.2%. Private consumption is expected to grow moderately as compared to last year growth of 6.0%. The growth in private investment, however, is still below last year's rate of 6.4%. The public sector's investment is expected to pick up the shortcoming by growing at 1.4%, a turnaround from a negative growth of 1.0% last year.

Malaysia's real GDP is expected to grow moderately at 4.2% this year. Growth will be driven largely by private sector expenditures, particularly on investment in the environment of tighter liquidity condition. BNM is expected to manage the liquidity favouring businesses. Public sector expenditure is projected to be influenced by continuing fiscal consolidation process as the depressed oil prices is expected to persist.

As for 2017, real GDP growth is expected to edge up moderately, registering a 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.



Posted by suzy at 02:57 PM