Continuing Growth Momentum
The International Monetary Fund (IMF) estimated global growth for 2022 to be 3.2 per cent in its October report, marginally reducing it from its April forecast. The World Bank, on the other hand, lowered its forecast from 4.1 per cent (as observed in January 2022) to 2.9 per cent in its June estimate.
Among the factors cited for the downward revision of expected growth is, above all, the Russia-Ukraine conflict. The war in that part of the world induces deep concerns about global instability and the possibility (although perhaps remote) of tensions escalating into a nuclear conflict, besides being a protracted affair. The Russia-Ukraine war has tremendous global repercussions ranging from a broader global conflict to rising food prices, animal feed shortages and high fertilisers cost. The electronic sector, particularly the semiconductor sub-sector, will experience the spillovers of the war in Ukraine due to shortages in neon and palladium.
The sanctions placed on Russia have rocked the global oil market, drastically reducing the global supply and increasing prices. The price of crude oil is expected to reach USD98.19, almost touching the panic level of USD100. Coupled with rising oil and gas prices expected to worsen in winter, particularly for the European region, the Ukraine war continues to exacerbate supply chain disruptions. These factors have played out through the rising prices of commodities. As reported by the IMF, World Consumer Prices are expected to increase to 8.8 per cent in 2022, a significant increase from a price increase of 4.7 per cent in 2021.
The unrelenting rise in prices is a phenomenon that has not been seen in decades. The Federal Reserve’s reaction to inflation in the US has been to undertake consecutive rate hikes. The Fed’s chairman, Jerome Powell, has adopted an aggressive monetary policy approach to bring inflation in the US down to a target rate of 2 per cent. Central banks the world over have responded with corresponding rate hikes, and Bank Negara Malaysia (BNM) is no exception.
The Malaysian economy has performed reasonably well against a pessimistic backdrop. Considering the positive outcome of recent macroeconomic indicators and key aggregates, MIER feels it justified to estimate a full-year growth of 6.8 per cent. This is an upward adjustment from the previous estimate of 5.8 per cent due to the cautious optimism we note among consumers and improving business sentiments, as noted in MIER’s surveys.
Real GDP has done well over the preceding quarters of 2022. In the first quarter of 2022, GDP growth stood at 5.0 per cent; it rose remarkably to 8.9 per cent in the second quarter, beating the expectations of most market observers. MIER is of the view that there are encouraging grounds to think that GDP growth for 3Q22 will continue to be robust, perhaps even outdoing the performance in the second quarter of this year.
The Malaysian economy’s growth has increasingly been fueled by domestic demand going into the second quarter of 2022. In the first quarter, public consumption had a slight edge over private consumption since public consumption increased by 6.7 per cent compared to private consumption, which grew by 5.5 per cent. However, in the second quarter, private consumption far outweighed public consumption in importance.
Trade was robust in September 2022. The results have been good on a y-o-y basis in September, increasing by 31.4 per cent. Total trade in September was RM256.9 billion. Exports, too, expanded by 30.1 per cent, bringing it to a total value of RM144.3 billion. From January to September, total exports have been encouraging in 2022 since they come up to RM1.159 trillion. This is an improvement of over RM888.4 billion as recorded for exports compared to the corresponding period in 2021. These results are encouraging in a scenario where the economy has emerged from the aftermath of the pandemic and against devastating setbacks. Nonetheless, it must be acknowledged that the country’s imports are high and have been increasing and perhaps will continue to be so into the early quarters of 2023.
MIER’s Consumer Sentiments Index (CSI) did improve in the latest survey, picking up 12.4 points every quarter to stand at 98.4 in 3Q22. While the increase must be appreciated, it has to be noted that the CSI has remained below the 100-point benchmark for the second consecutive quarter. MIER understands this to imply that consumer sentiments are improving though it is still early to consider them as indicating optimism. The CSI has been buoyed by households’ current finances, employment expectations and a better near-term financial outlook. In line with the brighter labour market, it is understandable that the survey reports improved expectations of growth in incomes and job prospects.
The Business Conditions Index (BCI), which is the outcome of a regular survey that MIER undertakes, also shows an improving state of business confidence, with the BCI touching 99.8 points in 3Q22 as opposed to 96.2 points in the previous quarter. The stronger index reflects the improved sub-components, such as the higher sales that companies enjoyed and the upsurge in domestic and external orders. The expectations regarding the coming months are less optimistic, which is indicated by the lower Expected Index, which has declined by 6.3 points q-o-q. The fact that the BCI has yet to reach the 100-point threshold level is telling. Nevertheless, there are clear signs that business confidence is improving, although the business sector may not be able to chalk 100 points in the next quarter since companies do not expect to do better.
The FMM-MIER Business Conditions Survey points to better readings for the first half of 2022 than 2H2021, but with a small margin of improvement. The FMM-MIER BCI was 109 in 1H2022, improving slightly from 107 in 2H2021. The forward-looking indicators are less encouraging. In fact, although the index recorded a value of 122 for 1H2022, the figure for 2H2022 is 94. It appears that the business sector expects a more challenging environment for the second half of the year.
The results of the FMM-MIER BCI show that the first half of the year was characterized by more positive manufacturing, high local sales instead of export sales, and higher capital investments. Most respondents reported higher production costs due to rising input, labour and logistics costs. On the other hand, the outlook for the year's second half is held back by a slowdown in sales (local and export), lower production volumes and lower capacity utilisation. Rising costs of raw materials, wages and logistics are expected to continue in the second half of the year.
In line with the findings in the surveys conducted, the labour market is somewhat more positive. However, firms experience a labour shortage, constraining their production potential, thereby suppressing private sector earnings. The full-year unemployment rate for 2022 can be expected to be lower than that for 2021. Thus, although for 2021 it was 4.6 per cent, MIER believes that the unemployment rate for the full year 2022 will fall to 3.9 per cent. This is reasonable because companies report better conditions, even though expectations for the coming quarter are rather subdued.
The economy’s fiscal space remains a concern. The current balance has been in negative territory in 1Q22 and 2Q22, with the contraction deepening. It is a concern that operating expenditure exceeded revenue in the first half of the year. The overall deficit has fallen from -23.8 per cent to -21.1 per cent. The decreasing deficit is probably a sign that the government wants to get a grip on the problem. If that is the case, the overall deficit as a percentage of GDP will likely come down from 6.4 per cent to 6.0 per cent.
The weakening of the Malaysian Ringgit should be watched carefully. Several factors are working against the MYR. Most countries are witnessing sliding national currencies. Given the aggressive stance taken by the Fed, BNM has little option but to react accordingly. Nevertheless, the ringgit is holding up quite well, considering that most currencies are not doing well. Our food import bill remains high. As mentioned earlier, Malaysia’s import bill is rising, but this cannot be avoided as Malaysia relies on imports to support its export-oriented industries. Pegging the ringgit may not be a good option, but caution is warranted. Appropriate monetary and fiscal policy tools, including macroprudential arrangements, must be used to contain the Ringgit's decline.
Macroeconomic indicators point to an improving economic environment for 3Q22. While growth in 3Q22 will not disappoint, the outlook for the fourth quarter may not be so smooth. There are still several downside risks that should be considered.
On the domestic front, political stability is a matter of concern. The impending elections will stir uncertainties, which will likely impact the business and policy environment. Expectations are high that the forthcoming GE15 will bring about political stability and, thereby, greater policy certainty.
The question of fiscal vulnerability remains on the radar. We expect the government to refrain from introducing more stimulus packages since the pandemic has settled to the endemic stage. Some issues that must be handled with care include the government’s policy on subsidies and managing the gap between revenue and operating expenditure. Sources of revenue will have to be re-examined.
A pressing issue that demands attention is tax revenue and the possible tax collection reform. The goods and services tax was removed and replaced by the sales and services tax. The SST has not been able to generate adequate revenue; neither is a return to the GST visible on the horizon. There has to be more clarity on the preferred tax regime. It may be helpful to revisit the problem.
The external environment is likely to become more challenging for several reasons. First, global demand may weaken in the coming months. The softening of demand from the US, EU and China could have unfavourable effects on the Malaysian industry.
Second, if the Fed’s rate hike continues in November, it will lead to tighter monetary policy in other countries. Central banks in most countries will react predictably. We expect the BNM to follow suit. Unlike most other countries, Japan is bent on taking a different path.
Third, the Ukraine war shows little sign of abating soon. This will mean that supply chain disruptions, the cost of certain raw materials and intermediate products, and oil supply will be at risk.
Malaysian Institute of Economic Research
10 November 2022
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