MALAYSIAN ECONOMIC OUTLOOK


The Malaysian economy grew by 4.7% in 2018 as projected by MIER. The economy is set to grow at a slower pace this year due to the slowdown in global demand as well as in domestic demand. The US-China trade war continues to be the major downside risk for the world growth although there has been positive progress made by China to Washington's requests during the 1st December Summit. Washington demanded Beijing to make structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.

The global economy continues to grow at a moderate pace amid a brittle demand and lessened trade flows. There are growing risks to the global growth tilted to the downside, predominantly due to factors related to trade policy uncertainty and the weakening financial market sentiments. Mounting trade tensions together with other emerging concerns, including slower growth than expected in the emerging market economies, is causing instability in the financial market. Against such backdrop, the world economy is expected to grow at a slower pace this year. The IMF projected that the world economy to grow by 3.3% and improve marginally to 3.6% in 2020, after growing at the rate of 3.6% last year.

The global economic slowdown is led by stagnation in manufacturing output due to declining global export orders. This is reflected in the February global PMI. Besides the manufacturing output, the services sector also reported a weaker growth. The pan-Asia manufacturing PMI declined for the first time in two and a half years. Among the countries that recorded a decline in their PMI are China, Taiwan, South Korea, Indonesia as well as Malaysia. For Malaysia, the slowdown in manufacturing activities is reflected in the declining Industrial Production Index (IPI). The monthly manufacturing IPI growth averaged out at 6.1% in 2017, slowing down to 4.8% last year and further down to 4.2% in January this year. The slower growth was underpinned by moderation in the export-oriented industries (average growth 2017: 6.7%; 2018: 4.4%). The growth was somewhat compensated by the domestic-oriented industries (average growth 2017: 5.0%; 2018: 5.6%).

China is also expected to grow at a slower pace this year. The weakened China growth has contagious effect on many world economies including Malaysia mostly through the trade channel. Meanwhile, there is no conclusion on Brexit in the middle of a lacklustre performance of major economies of the euro area. The recent announcement by the US to impose tariff on US$11.0 billion EU products is adding up more pressure on the global trade. The US economy is also set to be on a slower growth path. The FED is expected to maintain the policy rate as the economy is growing at a slower pace. The US unemployment rate is higher than expected and inflation rate is tame at a below 2-percent mark due to lower energy prices. This is contrary to the earlier expectation that the FED will increase the policy rate as economic growth accelerated.

The global manufacturing downturn is in agreement with the 1Q2019 MIER Business Conditions Index (BCI). The index fell to below the demarcation level of 100-point threshold of optimism for two quarters in a row. In the first quarter of 2019 the BCI slipped further down by one point from the fourth quarter (4Q2018: 95.3 points; 1Q2019: 94.3 points). The drop is apparently due to the current index as it fell to 88.6 points from the already below the optimism level of 89.5 in the previous quarter. While the expected index is still above the optimism level (111.4), although 1.1 point below the fourth quarter reading. Both sales and new export orders fell. The fall in new export orders is more conspicuous, that is a drop of 30.4% from the previous quarter. Nevertheless, the manufacturers are still optimistic about the near future. Indices for capital investment and expected export sales rose as compared to the fourth quarter 2018. The capacity utilization rate also recorded an increase, from 79.2% in the fourth quarter to 81.4% in the first quarter. As oppose to export demand, the new domestic orders recorded an improvement from the previous quarter.

With the backdrop of a slower global growth, the Malaysian economy is relying heavily on domestic demand to steer growth. Nonetheless, the domestic demand is expected to grow at a slower pace from what was previously anticipated. The growth is revised downwards by 0.7 percentage points to 4.4% as compared to our earlier forecast. The anticipated slowdown in domestic demand is attributable to a slower growth in both consumption and investment demand. Private consumption is expected to grow by 6.2% (0.2 percentage-point downward revision), while the public counterpart is also set to grow at a slower rate of 1.1% (0.4 percentage-point downward revision). Likewise, the growth in investment demand is also revised downwards by 1.7 percentage points to 2.2%. The growth in investment is mostly expected to come from the private sector as the government continues to address the issue of high public debt in the expense of investment spending. The slowdown in private investment is due to a moderation in global investment flows and a reduced demand for manufacturing goods. The BOP account shows that the inflow of FDI for last year was RM32.6 billion compared to RM40.4 billion in 2017.

Similarly, the growth in net exports is expected to slow down further to a negative 3.4% from the previous forecast of negative 1.5%. Imports growth is also revised downwards by 0.3 percentage points to grow by 1.6% (2017: 10.9%; 2018: 0.1%). Both exports and imports growths are expected to improve next year, growing by 3.7% and 4.5%, respectively. Notwithstanding the downward revision of the forecasts on the domestic demand as well as on the external demand, we maintain our growth projection for this year at 4.5% due to a higher base effect. Last year GDP was higher than expected due to a faster pace of growth in private consumption as well as better than expected export demand in the fourth quarter.

Consumers are most likely to go for cautious spending on the concern of the so-called high cost of living, although prices are under control and household debt burden is declining. The average headline inflation for 2018 was tamed at 1.0%, below the earlier expectation. While for the first two months of this year inflation rates were in negative territory. The household debt to GDP ratio has been improving over the years recorded 83.8% in the first half of 2018 (2017: 84.2%). The first quarter (1Q2019) MIER Consumer Sentiments Index (CSI) continued to dip further to 85.6 points from the already below optimism threshold level of 100 points in the fourth quarter of last year (96.8 points). This is the third consecutive drop. The survey results revealed that the index for current household incomes was flat compared to the previous quarter and incomes are expected to decrease in the coming months. The surveys also revealed that job outlook is unfavourable.

The world commodity outlook for this year is mixed. For the agriculture commodities, particularly the CPO, the demand is expected to improve according to the MPOB due to both an increase in volume coupled with better prices. The price of CPO is expected to touch RM2,700 a tonne this year as compared to the average price of RM2,232 for last year. This is mainly due to the increase in demand for biodiesel and weak ringgit. Malaysia is embarking into the full implementation of the B10 biodiesel for transport sector since the 1st February of this year (10% biodiesel blended with 90% petroleum diesel). Meanwhile, Indonesia is already ahead with the implementation of B20 biodiesel. In the meantime, production is expected to increase to 20.3 million tonnes, 4.0% increment from last year, due to the favourable weather and the increase in matured plantations.

The demand for petroleum products is bleak amid a slower global growth. Nevertheless, crude prices are rising after bottoming out at the end of last year. This is mostly due to supply disruption within OPEC producers as demand remains weak. Oil prices are creeping up after hitting almost a two-year low at the end of last year at US$52.2 a barrel for Brent crude oil. For now, Brent prices are hovering around US$70.0 per barrel underpinned by both demand and supply factors. On the supply side, OPEC production was down in March to 30.23 million barrel per day (bpd), the lowest in more than four years. Saudi production was the lowest in a year in addition to a supply disruption in Venezuela and Libya as well as the US sanctions on Iranian oil. Nevertheless, the rise in the US rig count pressures oil prices downwards. On the demand side, positive development on the US-China trade war so far has somewhat improve the global energy demand. Oil prices for this year are expected to settle in the range of USD60-70 per barrel, depending on the demand condition. Exports of palm oil and palm oil-based products together with oil & gas-based products accounted for about 23.0% of total exports for Malaysia.

The current account (CA) of the balance of payments (BOP) for last year remained in surplus but tapering down to RM33.5 billion, lower than expected. The CA balance for 2017 was higher at RM40.3 billion. The declining CA balance is partly due to a weakened global demand. However, the deficit in the services account for last year has improved to-RM19.7 billion from-RM22.2 billion in 2017, could be related to cheaper ringgit. Anyhow, cheap ringgit causing the worsening balances of the primary and secondary accounts. This year CA balance is projected to be at 2.5% of GNI.

The negative headline inflation for first two months of the year is a concern. Both the forces of cost-push and demand-pull are in effect causing negative inflation rates. On the demand side, slower money growth for the first two month of the year pointing to a lower demand for money. Loans approved and disbursed are also declining during the same period. From the supply side, there is also an indication that the negative headline inflation is causing by cheaper production costs. The non-core component, particularly the transport item, attributed to the volatility in the headline inflation. The transport index declined by 7.8% and 6.8% for January and February, respectively. The decline in the transport index in turn is due to cheaper oil prices. Cheap oil prices benefited producers through lowering production cost as witnessed by negative PPI for the past few months. Apparently cheaper production cost is passed to consumers. Nevertheless, the effect of the rise in transport index on the headline inflation is not expected to last as oil prices are trending upwards after hitting the lowest in two years at the end of last year. The headline inflation is expected to edge up the rest of the year averaging out at 1.3% due to the expansionary policy to support domestic demand and weak ringgit foreign exchange as well rising oil prices.

Posted by kala at 03:26 PM on April 16, 2019

MALAYSIAN ECONOMIC OUTLOOK


Executive Summary



The Malaysian economy is estimated to grow by 4.7% in 2018 pending the fourth quarter results. There are more data available pointing towards a moderation in growth for this year as we have projected earlier. The global economy continues to grow at a moderate pace amid a brittle demand and lessened trade flows. There are growing risks to the global growth tilted to the downside, predominantly due to factors related to trade policy uncertainty and weakening financial market sentiments. There are still lingering uncertainty in trade directions when the ceasefire on the US-China trade war ends on the 1st March 2019. The mounting trade tensions together with other emerging concerns, including slower growth than expected in emerging market economies and the US government shutdown, are causing instability in the financial market.



The advanced economies as a group is expected to grow at a slower rate this year due to developments in the euro area, although the US growth is on track, albeit on a slower growth path, and Japanese economy is performing better than earlier anticipated. In Europe, there is no conclusion on Brexit in the middle of a lacklustre performance of major economies of the euro area. The FED is expected to raise the policy rate soon and the ECB has also announced to discontinue asset buying. Against such backdrop, the world economy is expected to grow at a slower pace this year. The IMF projected the world economy to grow by 3.5% and improve marginally to 3.6% in 2020, after growing at the estimated rate of 3.7% last year.

The effect of the US-China trade war on China, Malaysia's largest trading partner, is apparent as its December manufacturing Purchasing Managers' Index (PMI) has contracted. Apparently, Malaysia's December PMI has recorded an even larger contraction and this is attributed to a declining index of the new goods export orders. Likewise, the Industrial Production Index (IPI) growth has also moderated due to slower growth in the manufacturing index as well as in the mining index. The slower growth in manufacturing, in turn, is due to a moderation in the export-oriented industries. With the backdrop of a slower global growth, the Malaysian economy is relying heavily on domestic demand to steer growth. Accordingly, we maintain our growth projection for this year at 4.5%. The growth is expected to pick up a little bit next year in the range of 4.5-5.5%.


Domestic demand is expected to grow by 5.1%, underpinned by a robust albeit slower growth in private consumption at 6.4%. Consumers are most likely to go for cautious spending due to the concern of the so-called "high cost of living", although prices are under control and household debt burden is declining. The average headline inflation for 2018 was tamed at 1.0%, below the earlier expectation. The 2019 headline inflation however, is expected to be higher at the average rate of 2.0% due to expansionary policy to support domestic demand and a weak ringgit foreign exchange.

The Ringgit is affected by the volatility of the financial market as short-term investors continuously rebalance their portfolio due to monetary policy differential as well as heightened policy uncertainty among developed nations. The balance of portfolio investment for the first half of 2018 was in the red (-RM40.9 billion). At the same time, a weakened external demand was also adding up to the downward pressure on ringgit.


The fourth quarter MIER Consumer Sentiments Index (CSI) dipped to below the optimism threshold (100 points), recording 96.8 points, after two quarters remaining above 100 points. This is the second consecutive drop in a year. The survey results revealed that the index for current household incomes was down from the previous quarter, while inflationary expectations edged up from the previous quarter. Indices for jobs and financial outlook were also down from the previous quarter, although better than the same quarter a year ago.




Public consumption is projected to grow modestly at 1.5%, partly due to the government policy on cautious spending in the effort to address the issue of high public debt and at the same time experiencing reduced revenue without the goods and services tax (GST). The government is anticipated to enhance fiscal stimulus to boost growth as easy money would intensify capital reversal following the monetary policy normalization among developed economies. Nevertheless, due to the lower than expected government revenue this may limit the fiscal space for such policy.


The overall investment growth for this year, private and public, is expected to moderate. This is partly due to the government policy to review selected big-ticket investments in the effort to address the issue of high public debt. This has a spill-over effect on private investment, which in turn will have a negative influence on private consumption. The overall Investment is projected to grow by 3.9%, attributed to 5.3% growth in private investment and 0.5% growth in its public counterpart. The slowdown in investment is due to a moderation in global investment flows and a reduced demand for manufacturing goods. The BOP account shows that foreign direct investment (FDI) for the first three quarters of last year was RM18.7 billion, which was about half of the level of the same period of 2017, RM37.6 billion.


The moderation in investment is also consistent with survey results of the fourth quarter MIER Business Conditions Index (BCI). The capital investment index of the BCI dropped by 12.9% from the third quarter. Likewise, the capacity utilization rate also dropped to 79.2% as compared to 82.8% in the third quarter, reflects a weaker demand. The overall BCI for the fourth quarter slipped into a below the demarcation level of 100-point threshold of optimism (95.3) as compared to 108.8 in the previous quarter and 116.3 in the second quarter- two quarters drop in a row. The drop in the fourth quarter BCI is attributable to the deterioration of the current index (89.5) as the expected index improved (112.5). The fall in the current index is due to a slowdown in the manufacturing sector as shown by the deterioration in indices for sales (-20.0%), production (-21.5%), new domestic orders (-51.8%) as well as new export orders (-10.0%). Meanwhile, the improvement in the expected index is due to the increment in indices for expected production and expected export sales. It shows that businesses are still upbeat about outlook for the first quarter of 2019. Businesses also expected that the first quarter of 2019 employment prospects to remain stable but wages would be rising. The survey result also disclosed that consumers expect prices to remain stable.


The external trade for this year remains challenging as global growth is dwindling. Growth in exports is expected to moderate at 1.5%, a 0.4 percentage point reduction from MIER's earlier projection, as certain downside risks became clearer. Imports growth is also revised downwards by 0.3 percentage point to grow at 1.9%. Both exports and imports are expected to grow faster next year by 3.7% and 4.5%, respectively. The growth of exports of manufactured goods are expected to deteriorate, including for E&E products which accounted for about 40.0% of total exports. This is largely due to the knock-on effect of the US-China trade war. The December manufacturing PMI has shown that China's manufacturing output has contracted, alongside with an even larger contraction for Malaysia's manufacturing output.


The world commodity outlook for this year is not expected to be exiting either. The agriculture sector is projected to grow at a slower pace for this year at 1.3% compared to the impressive growth of 7.2% in 2017. The growth was haunted by sluggish demand and lower prices for palm oil and palm oil-related products. Although the demand from the two largest importers, India and China is improving, a large inventory accumulation in Malaysia and Indonesia exerts a downward pressure on the already cheap prices. Nevertheless, the effect of El Nino is still probable to bring the supply down. Meanwhile the campaign against palm oil by Europe continues to tarnish the industry. Exports of palm oil and palm oil-based products together with oil & gas-based products accounted for about 23.0% of total exports.




The demand for petroleum products is also bleak amid a slower global growth. Meanwhile, crude prices are pressuring downwards due to the oversupply condition. OPEC bids to cut production would be futile as America's shale oil production continues to rise. The beginning of 2019 sees the oil market is gradually rebalancing as the US shale growth is slowing down and OPEC started to cut production. Nevertheless, the weaker than expected growth in China that will further weaken oil demand could upset the market again. Oil prices for this year are expected to settle in the range of USD60-70 per barrel, depending on the demand condition.


Pending the fourth quarter data, current account (CA) of the balance of payments (BOP) for last year is expected to remain in surplus but estimated to be tapering down to RM36.3 billion. The three-quarter balance of the CA now stands at RM22.7 billion. The third quarter CA balance was RM3.8 billion, lower than the previous two quarters. The declining CA balance is partly due to a weakened global demand. Meanwhile, the deficits in the services account, as well as in the primary and secondary accounts, are not expected to improve. This year CA balance is projected to be 2.5% of GNI.

Posted by kala at 03:49 PM on January 30, 2019






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