Recent QET

Recent QET

2019Q3: A priority for action, now more than ever

24 September 2019

Executive Summary


World Economic Situation and Prospects for 2019

  • Risk of a global recession is high and rising. Fears of a global recession are rising, taking cue from the signals transmitted through bonds, equities, currencies and commodities, which are increasingly disturbing for investors. The wheels of global economic slowdown already set in motion as reflected in further weaknesses in global trade, investment and manufacturing data. The silver lining is the continued growth in service sector, albeit moderately. Heightened concerns over a global recession risk brought on by slower global growth and the worsening of the US-China trade hostility have badly shaken global financial markets and weighed on business and investors’ sentiment.
  • Advanced economies are feeling the heat. Amid resilient consumer spending, the US economy will ease in 2H 2019 on a weaker global outlook and the ongoing US-China trade dispute weighing on business investment, manufacturing and exports. Growth in euro area is slowing sharply this year due to lingering weakness in the industrial and external sectors amid elevated risks from slower-than-expected growth in China, a hard Brexit and other political concerns. While Japan’s growth is supported by domestic demand and construction works related to the 2020 Tokyo Olympics, the intensified trade war is hurting Japan’s all-important external sector. Uncertainty linked to the trade war with the US will continue to weigh on China economy while domestic economic imbalances pose further risks to its growth outlook. Nevertheless, fiscal stimulus and accommodative monetary policy should buttress the economy.
  • Zero or negative interest rate is a new normal again? What began as a measured pace of rate easing by the Federal Reserve in July has evolved into a situation in which almost every major central bank races to cut interest rate to stay ahead of trade and currency wars. The European Central Bank (ECB) has reduced the deposit rate to minus 0.5% from minus 0.4% and revived its bond purchase program from 1 November at a pace of 20 billion euros (US$22 billion) a month for as long as necessary to hit its inflation goal. While the global economy is not in recession yet, but some central banks have almost exhausted their monetary arsenal on overriding concerns over the negative transmission of trade spats and financial volatility on the domestic economy.
  • Do Governments have sufficient policy tools to avert a financial crisis or global recession? A severe enough economic or financial shock could usher in a global recession, even if central banks respond rapidly. Monetary policy tools are limited for most central banks as interest rates are already at very low level. In Europe and Japan, central banks are already in negative-rate territory for a longer while. Faced with slow growth prospects, political discontent, and large fiscal deficits and debt burdens of government would constraint the deployment of fiscal policy for some countries.


Malaysia’s Economic and Financial Conditions

  • The Malaysian economy slowed in 1Q19; downside risk remains. Malaysia’s economic growth grew at a slower pace of 4.5% yoy in 1Q19 (4.7% in 4Q18) due to slowing have printed a slower GDP growth in the second quarter, the Malaysian economy expanded further to register higher economic growth rate of 4.9% yoy in the second quarter of 2019 (4.5% in 1Q), taking the growth to 4.7% in the first half-year of 2019. Even if the economic growth slows to an average of 4.5%-4.7% in the second half-year, it is likely to meet the mid-range of Bank Negara Malaysia (BNM)’s estimate of 4.3%-4.8% for this year. SERC maintained this year’s GDP growth estimate at 4.7% (4.5%-4.7% previously) and forecast economic growth of 4.5% for 2020.
  • Domestic demand remains key pillar of the economy. Domestic demand growth, which grew by 4.6% yoy in 2Q (4.4% in 1Q), was largely underpinned by consumer spending (57.0% of total GDP), which increased higher by 7.8% in 2Q (7.6% in 1Q). Going into 2H 2019, households spending is likely to continue, albeit slower due to cautious discretionary spending amid the support of lower interest rate. While the unemployment rate remained unchanged at 3.3% in May-July (1Q: 3.3%), private sector wages grew slower by 4.2% (1Q: 4.9%). Private consumption is estimated to grow by 7.2% in 2019 and 6.7% in 2020.
  • Private investment remains slackened. Private investments printed a subdued growth of 1.8% yoy in 2Q though had improved from 0.4% in 1Q. In 1H 2019, private investment grew 1.2% (3.4% in 1H 2018). Nonetheless, uncertainty surrounding global trade tensions and prevailing weaknesses in the broad property segment, especially residential and commercial properties continued to weigh on the investment growth performance. We expect private investment to expand moderately by 2.6% in 2019 and 3.5% in 2020.
  • The slackening private investment growth corresponds with The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM)’s Malaysia Business and Economic Conditions Survey (M-BECS) findings for 1H and 2H 2019, which revealed that 42.7% of respondents indicated that they either have invested or plan to invest in Malaysia over next 12-24 months while 57.3% indicated that they have no intention to invest over next 12-24 months. Within the group of respondents planning to invest, 26.1% of respondents adopt a “wait-and-see” approach as they are still waiting for a clearer direction on the economy and government’s policy landscape as well as weighed by the uncertainties surrounding global economy.
  • Exports estimated to grow by 0.5%-1.0% in 2019 and 2.0%-3.0% in 2020. Slowing global demand and negative spillover effects from the trade hostilities. Exports have displayed uneven trends to decline by 0.4% in Jan-Jul 2019 (2Q: -0.4% and 1Q: -1.1%), dragged down by weak global demand, slower exports of electronics and electrical products as well as moderate commodity prices.
  • The external sector though added 1.4 percentage points to 2Q’s GDP growth, it was due to a compression in imports (largely intermediate and capital goods) relative to subdued exports. This is not a good sign as it shows that businesses were not undertaking capex spending as spending on machinery and equipment had contracted for three consecutive quarters (4Q18: -1.3%; 1Q19: -7.4%; and 2Q19: -4.2%).
  • Headline inflation will remain benign. Headline inflation continues to rise moderately by 1.4%-1.5% in recent months, mainly to reflect the lapsing of consumption tax. In Jan-Jul 2019, inflation was averaged 0.3%. We estimate headline inflation to average lower at 0.8% yoy in 2019 (1.0% in 2018) and 2.0% in 2020 as the anticipated pick-up in consumer inflation, mainly from fuel-related items to remain weak. Pending the implementation of targeted fuel subsidy scheme for RON95, there could be some upside risks to the petrol prices. Even with the removal of RON95 price cap, prices are expected to be on the low side in line with softening global crude oil prices, which are affected by slowing global economy and the intensified trade tensions. That said, volatile crude oil prices remain a wild card.
  • Bank Negara Malaysia has leeway to cut interest rates if growth weakens. Bank Negara Malaysia (BNM) is amongst the few central banks that was ahead of the curve to cut interest rates by 25 basis points (bps) to 3.00% in May to provide an insurance against increasing external risks on the domestic economy.
  • While low inflation gives BNM’s space to lower interest rate should the economy under threat, the central bank will continue to monitor the incoming data and global development, and would reserve its monetary arsenal while continue to assess the impact of May’s rate cut on domestic demand. It must be noted that the rate cut takes a lag impact of 2-3 quarters. In this regard, Bank Negara Malaysia is expected to keep the policy rate at 3.00% for now.
  • Ringgit will remain volatile. Along with other regional currencies, the ringgit is likely to move in a tight range, tracking with the performance of the US dollar and Chinese renminbi. Two policy risk events to watch are (a) The FTSE Russell’s decision whether to exclude Malaysia bonds from its World Government Bond Index (WGBI) on 26 Sep; and (b) The US Treasury’s review of Malaysia in the Monitoring List on currency practices and macroeconomic policies in 4Q. Investors are eyeing on the tabling of Federal Budget 2020 on 11 October, keeping a close tab on the fiscal deficit path and pinning hopes on the Budget will deliver some positive catalysts to growth. SERC estimates the ringgit to trade between RM4.15 and RM4.20 per US dollar at end-Dec 2019 (End-Dec 2018: RM4.1385/US$).
  • 2020 Budget on 11 October should be expansionary. The budget deficit for 2020 is estimated to be around 3.2% of GDP, a slight improvement from estimated 3.4% of GDP in 2019. Gross development expenditure is estimated to rise by 4.0% to RM55.5 billion in 2020 (estimated RM53.4 billion in 2019).
  • The 2020 Budget policies can be crafted to allow some room for an expansionary stance, focusing on high impact sectors, quick gains initiatives and measures that would protect growth-enhancing spending and investment.
  • The Budget’s thrusts must aim at strengthening economic resilience, sustaining domestic spending and investment, save jobs, create jobs and help viable companies staying afloat. It also prepares Malaysia to emerge stronger and enhance our capabilities and competitiveness for the medium- to long-term.


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