Recent QET

Recent QET

2019Q1: The Challenge to Sustaining Momentum

23 April 2019

Executive Summary


World Economic Situation and Prospects for 2019

  • Global growth is moderating amid fears of a global recession. In the second half-year of 2018, isolated evidence and high frequency indicators confirmed that global growth had peaked. The data since the turn of the year has been unambiguous with major advanced economies and China looking weaker than they did twelve months ago. All signs are pointing towards a synchronized slowdown in advanced and emerging economies. Moderating economic activities and heightened policy risks are clouding global economic prospects. Global trade and investment have softened. Business and consumer confidence have fallen on concerns about the global economy.
  • Global growth forecasts lowered. The International Organisations and Institutions have concurrently lowered global growth forecasts, citing rising risks associated with trade tensions and tightening financial conditions. (a) The International Monetary Fund (IMF) further cut its global growth projection for 2019 to 3.3% from 3.5% previously, marking the third revision from 3.7% and 3.9% previously; (b) The Organisation for Economic Co-operation and Development (OECD) lowered its forecast to 3.3% for this year, down from the 3.5% made in November 2018; and (c) The World Bank downgraded its outlook for the global economy to grow by 2.9% in 2019 from 3.0% forecasted in June last year.
  • Signs of slowing momentum in most major advanced and emerging economies. (a) The US economy is reeling the effect of fading fiscal stimulus, lingering uncertainties about the trade friction outcome and the lagged impact of monetary tightening; (b) Growth in euro area is dampened by sluggish global trade, geopolitical uncertainty and policy risk about sovereign debt and budget in Italy; (c) Japan’s too is influenced by global trade uncertainty, slowing China demand and a downturn in the global tech cycle; and (d) China’s growth is teetering on a slowing path due to ongoing structural reforms, trade disputes amid monetary easing and fiscal support.
  • Global central banks switching towards a dovish monetary mode. Worrying about the risks clouding global economic prospects and the spillover effects on domestic economy, it makes sense for global central bankers to go into a wait and see mode, slanting towards more dovish shift in monetary policy. The US Federal Reserve (Fed) has pivoted towards renewed dovishness as it signalled the pausing of interest rate normalisation amid ending its balance sheet reduction by September this year. Some emerging market central banks have switched from tightening into easing mode starting February, taking cue from the Fed’s dovish turn and a dollar rally that has run out of steam, for now.
  • Four clouds undermining the global economy. While the risk of an outright global recession is low for this year, we are heading into a year of synchronised global growth deceleration. The main factors undermining the global economy are: (a) Unresolved trade tensions and tariff escalations; (b) Tightening of financial condition; (c) Uncertainty related to Brexit outcome; and (d) Spillover impact from an accelerated slowdown of the US and China economy.


Malaysia’s Economic and Financial Conditions

  • Economic environment still challenging in 2019. Weighing on moderating global growth, weakening exports amid cautious domestic sentiments, SERC expects real GDP growth to grow by 4.5-4.7% this year (4.7% in 2018), which is somewhat in line with Bank Negara Malaysia (BNM)’s estimates of 4.3-4.8% released in March. The balance of risks is tilted towards the downside.
  • Economic indicators pointing towards growth moderation. The leading index, which indicates the direction of economy in average four to six months ahead, exports, industrial production and loans data suggest that domestic economic and business conditions continued to remain moderate. Our preliminary estimate of GDP growth for the first quarter is 4.4% as against 4.7% in 4Q18.
  • Tracking of private consumption and private investment indicators. Consumer spending has turned cautious as reflected in car sales volume growth moderated to 0.4% yoy in February from 10.7% in January. Imports of consumption goods contracted by 11.6% in February while loans extended for consumption credit also grew moderately. The payment of the first phase of 2019 Cost of Living Aid (BSH) of RM300 for eligible households on 28 Jan is expected to benefit up to 4.1 million households involving an allocation of RM1.2 billion. Private investment indicators, loans extended for businesses and imports of capital goods were disappointing. This coupled with cautious business conditions are expected to weigh on private investment.
  • ACCCIM’s M-BECS suggests cautious economic and business conditions. The Associated Chinese Chambers of Commerce and Industry Malaysia (ACCCIM) Malaysia’s Business and Economic Conditions Survey (M-BECS) lend credence to our assessment of a challenging year for the economy and businesses. Faced with the softening global growth, still considerable external headwinds amid weak domestic sentiment, businesses in Malaysia are generally cautious about the economic outlook in 1H19 with 50.2% of respondents were “neutral” and 37.5% were “pessimistic”. Only 12.3% of total respondents were “optimistic”. On balance, businesses are of the view that the Malaysian economy would remain challenging in 2019 as there are higher respondents (32.6%) who are “pessimistic” relative to being “optimistic” (15.3%).
  • Exports unexpectedly contracted in February. Amid the shorter working days during the festive celebration, exports fell more than expected by 5.3% yoy in February, the first contraction since August last year as trade slowed with most of its partners and also major products (palm oil, crude petroleum and petroleum products). External trade for the months of March to May are crucial to watch as the market is awaiting the US-China’s trade talks outcome. SERC estimated total exports growth to pace at a slower rate of 3.3% in 2019 compared to 6.8% in 2018. The dampening factors on exports are slowing global demand, weak global semiconductor sales as well as moderate commodity prices.
  • Negative inflation for two successive months. The Consumer Price Index (CPI) continued to contract by 0.7% yoy in January and 0.4% yoy in February, marking the first deflation since end-2009. It is merely a technical deflation due to the decline in fuel prices and the replacement of Goods and Services Tax (GST) with Sales and Service Tax (SST). Domestic demand conditions though have softened but did not experience a broad-based fall in prices of goods and services. Core inflation stays in positive territory. SERC expects headline inflation to average 1.0-1.5% in 2019 (1.0% in 2018) as against BNM’s estimated 0.7-1.7% due to some cost pass-through from domestic cost factors. These include the lapse in consumption tax policy; increase in minimum wage and higher electricity surcharges for businesses; and potential higher increase in food prices.
  • Domestic interest rate on watch. With inflation risk being put on the back burner, BNM is expected to focus on sustaining domestic demand to counter the impact of moderating global growth on exports. The monetary policy decision will be data dependent. Chances of a cut in BNM’s overnight policy rate (OPR) have increased in the Monetary Policy Committee (MPC) meeting on 7 May. We expect the OPR to reach 3.00% by end-2019 (3.25% at end-2018).
  • The ringgit continues to face headwinds. On the back of lingering uncertainties in external environment such as moderating global economic growth, slowing exports amid the outcome of ongoing trade friction negotiations, the ringgit continues to move between RM4.0605 and RM4.1425 per US dollar in recent months.
  • It remains vulnerable to the bout of negative sentiment and developments that would trigger portfolio investment rebalancing. The announcement by FTSE Russell putting Malaysia on a watch list of fixed income markets for a review for potential downgrade to “1” from “2” currently would render Malaysia ineligible for inclusion in FTSE World Government Bond Index (WGBI) at the September 2019 review. This may add downward pressure on the ringgit as foreign investors rebalance their portfolio investment holdings. Nevertheless, the pressure from increasing Fed fund rate is relieved at the moment as the Fed released a stronger pausing signal of rate hike for this year, at least. On home front, the fundamental factors like the projected continued economic growth, current account surplus and regaining ground of foreign reserves would continue to support the ringgit. The ringgit is estimated at RM4.00-4.15 per US dollar at end-2019 (End-2018: RM4.1385/US$).


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