Recent QET

Recent QET

2018Q4: The Malaysian Economy - Glass Half Full or Half Empty?

17 January 2019

Executive Summary


World Economic Situation and Prospects for 2019

  • Heightened concerns over slowing global growth. The global economy continued to grow at a moderate pace in the fourth quarter of 2018, extending its moderating trajectory after peaking in the first half-year of 2018. A synchronised global slowdown will persist in 2019 amid lingering concerns about the outcome of the US-China’s 90-day deadline trade truce talks to thrash out their trade differences before a 2 March 2019 deadline; the UK’s Brexit deal by end-March 2019 as well as unpredictable geopolitical events and political risks. Intensified concerns about slowing global economy has caused extreme volatility in global financial markets and fast tumbling crude oil prices. Oil prices have plunged more than US$30 a barrel since the start of October 2018, when Brent crude rose to nearly US$87 a barrel and US WTI crude traded just shy of US$77.
  • A critical year ahead, focusing on the drivers of global economy stress. While we expect the global economy to expand at still-moderate pace (estimated 3.6% in 2019 vs. estimated 3.9% in 2018), significant risks are materializing and darker clouds are looming. The biggest storm is the possibility of a messy global trade war, no-deal (hard) Brexit could further dent investors’ confidence as well as the deteriorating and over-tightening global financial conditions. If the US and China’s trade negotiations come to a “compromise” deal without ramping up more tariffs, it bodes well for the global economy at a time when the US economy is facing headwinds and China faces softening growth.
  • Continued slow growth in advanced and emerging economies. While current and forward economic indicators for advanced economies have slowed albeit mixed, they are not collapsing. The US economy grew a brisk 3.4% annualised qoq rate in 3Q18 and a growth of 2.5-2.8% is expected in 4Q18, putting the economy on track to record 3.0% growth in 2018. The strength of the US economy will likely to fade towards end-2019 as the fiscal stimulus effects run out of steam. In the euro area, real economic and sentiment indicators suggest further deceleration of activity. In Japan, 2019’s GDP growth should be supported by Bank of Japan (BOJ)’s ultra-loose monetary policy, a tight labour market and construction works related to the 2020 Tokyo Olympics amid the impact of persistent trade tensions on exports and the planned hike in consumption tax will weigh on consumption. Growth in Asia though has slowed but still credible. China’s economy will continue to slow in 2019 (estimated 6.3% vs. 6.7% in 2018) on continued deleveraging from a slump in the property market amid the dampening impact of uncertainties surrounding the trade spats with the US as well as a slowdown in global economy.
  • Will global interest rates on easing mode? The Federal Reserve (Fed) ended the year 2018 with four rate hikes, taking the Fed funds rate to 2.25-2.50% (three rate hikes in 2017 to 1.25-1.50%), citing still strong economy and near-balanced inflation risk. The Fed lowered its interest rate hikes projection to two for 2019 from three previously, citing continued monitoring of economic conditions (data dependent). While market consensus expect the nearing of rate-hiking cycle, the baseline Fed funds rate is expected to reach 2.75-3.00% by end-2019. While the European Central Bank (ECB) has halted its quantitative easing in December 2018, it would continue to reinvest the principal payments from maturing securities “for an extended period of time” while keeping interest rates at their present record-low levels until at least the end of summer. BOJ is expected to continue maintaining easing monetary policy given sluggish inflation. Most Asian central banks are expected to keep policy rate steady as the Fed looks toward topping its interest-rate hiking cycle.


Malaysia’s Economic and Financial Conditions

  • Growth bottoming out in 3Q18? Stronger exports, higher industrial production and services output for the months of Oct-Nov suggesting an improvement in GDP growth in the fourth quarter, which is estimated to grow by 4.5-4.6% (4.4% in 3Q18). This would bring the full-year GDP growth to 4.7% in 2018 (5.9% in 2017).
  • A tumultuous year for 2019. With the global economy looking to moderate further and weaker exports, the Malaysian economy is expected to grow at a gentle pace of 4.7% in 2019. Still, domestic demand (2018: 92.3% of total GDP) will remain the dominant driver of economic growth with private sector spending (72.3% of GDP) holding the fort as public sector spending (20.0% of GDP) continues to rationalise, focusing on essential sectors and programs.
  • Slower consumer spending but still respectable. Solid consumer spending has been sustaining at a buoyant rate of averaging 7.4% yoy during 2017-3Q18 to support overall economic growth. The central question is whether its strength can be sustained in 2019? While the one-off spending boost from a 3-month tax holiday will normalize in 4Q18 and in 2019, private consumption growth is expected to grow by 6.8% in 2019 (estimated 7.3% in 2018) as supported by stable employment and income growth. According to the Malaysian Employers Federation’s (MEF) Salary Surveys for Executives and Non-Executives, overall average forecast salary increases for executives in 2019 is 4.86% (4.88% in 2018) while it is 4.89% in 2019 (4.88% in 2018) for non-executives. Higher minimum wage increases (between 10.0-19.6% or RM100-180 per month) as well as continued cost of living aid also help to ease the burden of low and middle income households. Moderate inflation along with lower petrol prices bode well for consumption.
  • Caution prevails for private investment. Slower global economy amid persistent trade tensions and global financial markets’ volatility as well as investors still getting in tune with domestic policy landscape, private investment growth is likely to stay in cautious mode. Private investment, which grew by an average growth of 4.5% yoy in the first nine months of 2018 will expand moderately higher from estimated 4.1% in 2018 to 4.3% in 2019. Capital spending in the manufacturing and services sectors continued, offsetting slower growth in construction and mining sectors.
  • A more difficult outlook for exports. Exports hit a record high of RM96.4 billion or an increase of 17.7% in October before easing off to RM84.8 billion or +1.6% in November, partly reflecting the normalisation of the front-loaded shipments ahead of the planned higher tariffs of 25% of the US-China’s trade war starting 1 January 2019, which has been postponed for three months until 2 March to set the stage for a 90-day trade truce talks (December 2018 to February 2019). Looking ahead, exports will be challenged by slowing global demand for electrical and electronic products, weaker commodity and crude oil prices as well as technical base effect of high exports value averaging RM83.3 billion per month in 2018. We estimate exports to grow at a slower rate of 3.3% in 2019 (estimated 6.9% in 2018; 18.8% in 2017).
  • Inflation will pick up gradually. Despite the introduction of Sales and Service Tax (SST), inflation continues to stay on the backburner with annual inflation rate hovering between 0.2% and 0.6% between September and November 2018, thanks to a high year-ago base effect. Softer prices of food and housing as well as a sharp decline in transport prices also helped keeping overall general prices at subdued levels.
  • With fuel prices reverting to a weekly managed float system starting January 2019 while working on the targeted fuel subsidy by the second quarter, headline inflation is likely to be influenced by variation in global crude oil prices. Post-SST two months transition period allowing for inventory adjustment, hypermarkets and retail chains had to adjust their prices by 15 November. Headline inflation is estimated to increase gradually to 1.5-2.0% in 2019 from estimated 0.9% in 2018.
  • Interest rate is seen on hold with “easing” bias. With the balance of risks tilting toward the downside, Bank Negara Malaysia (BNM)’s monetary policy stance ahead will be data dependent, focusing on ensuring domestic demand can endure the dampening impact of external headwinds. SERC expects BNM’s Overnight Policy Rate (OPR) to hold steady at 3.25% in 2019. What would prompt a cut in interest rate is when real GDP growth slipping to around 4.0% even at the expense of exerting downward pressure on the ringgit.
  • The Ringgit will strengthen gradually in 2H19. The fundamental drivers to support ringgit are positive economic prospects, continued surplus in current account, healthy foreign reserves, stable fiscal and debt path as well as the affirmation of Malaysia’s sovereign ratings.
  • The restraining factors weighing on the ringgit are concerns about slowing global economy, capital flows volatility and the prospects of higher US interest rates, which the Fed has scaled down the number of hikes in 2019 to two from three previously.
  • On balance, SERC expects the ringgit to remain weak in most of 1H19 before gathering strength towards 4Q19, taking into account the likely pausing of the Fed’s interest rate or could be peaking in 3Q19. This would take some pressure off the ringgit. Our end-2019 ringgit per US$ target is RM3.95-4.00 (End-2018: RM4.1385/US$1).


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