Executive Summary
World Economic Situation and Prospects
- 2019’s global growth the slowest pace since 2009. The global economy has been dogged by many disruptors and uncertainties since 2018, which had experienced a synchronised slowdown in 2H 2018. Global economic growth is expected to fall to 3.0% in 2019, the slowest pace since 2008-2009 Global Financial Crisis and decelerated from a 3.8% pace seen in 2017. Both the US and China economies have slowed, largely inflicted by more than 19 months long trade dispute amid slowing investment.
- Watching for inflection points in 2020. The 2020 macro environment is expected to remain either somewhat stable or improve gradually as global central banks’ unusual late-cycle interest rate cuts and easing trade tensions helped to uplift sentiment though uncertainties over trade still linger.
- Market and investors will be looking for an inflection point(s) to ascertain whether some stabilisation in global growth is on the horizon, paving the way for a convincing growth recovery.
- The base case scenario for the global economy is a trade-war retreat or a material de-escalation of the trade tensions, and this will help to reduce the uncertainty and probably acts to spur global growth and market sentiment. The prospects of a “phase one” US-China trade deal and lower US interest rates have eased the tight liquidity condition and enhanced borrowing conditions to support consumer spending under a firm labour market condition. The effectiveness of coordinated global central banks’ monetary easing and quantitative easing (QE) as well as China’s massive policy stimulus would set the scene for stronger global growth in early 2020.
- The inflection points to watch in 2020 are: (i) The signing of “phase one” partial trade deal between the US and China scheduled on 15 January should be a positive step to lay the foundation for future negotiations. More importantly, it is hope that more concrete agreements than less will ensue leading to a roll back of other tariffs in stages. Effective implementation and enforcement are the key; (ii) President Trump confronts one dilemma going into the 2020 amid public impeachment hearing. Without striking a clear deal approaching the 2020 US Presidential elections, there’s a rising risk that tariffs will remain effect throughout 2020. A pause in the escalation of the trade tensions would help a slowing US economy to bounce back in an election year; and (iii) Low, zero and negative interest rates have become the new normal. What if an ultra-dovish monetary stimulus fails to work? The Fed has signalled that policymakers saw no need to boost the economy further anytime soon. Amid the fiscal limitation and high public debt level, fiscal policy has to be reinstated as the main tool for managing business cycles and supporting economic growth had monetary policy reached its limits?
- The US and China economy in focus. The US economy is expected to cruise along albeit slower at 1.9% in 2020 as the fiscal card through tax cuts in 2018 has ebbed amid the support of low interest rate. The US President Trump seeking re-election, facing impeachment proceedings at home, and with the election looming, needs to boost US activities. Strong jobs growth should keep the consumer spending resilient. China’s economy is in the midst of a structural slowdown as the country transitions away from its credit-intensive growth model. In the Eurozone, a gradual pick-up in growth is envisaged, driven by resilient domestic demand and progress on Brexit, albeit facing the risk from trade conflicts. Japan’s economic growth is likely to slow notably, largely as the sales tax hike will restrain private consumption amid positive spillovers from the 2020 Olympics and low unemployment.
- Broad-based central banks’ easing bias remains. What’s next for the central banks in 2020? Monetary easing bias remains amid receding recession fears. Future monetary actions will be data dependent and if growth ebbs below the trend pace, that could cause the policy makers to ease interest rate again. The Fed is likely to pause future rate actions for a while, at least into the first half of 2020. Bank of Japan (BOJ), European Central Bank (ECB) and most emerging markets’ central banks are expected to keep either negative or low interest rates for greater part of 2020.
- Main macro risks for 2020 stemming from trade war. A partial “phase one” trade deal between the US and China is expected to allow gradual negotiation progress to be made over the course of 2020. The key risk is re-escalation of the trade war. Though the US economy is on a solid footing, lingering uncertainties surrounding the on-going trade negotiations as well as the looming 2020 Presidential elections remain a key downside risk. Uncertainty about economic and trade policy, particularly if there is a close presidential race, may weigh on business and household decisions in 2020. Political and geopolitical risks will linger and have the potential to quickly shift investors’ sentiment.
Malaysia’s Economic and Financial Conditions
- Malaysia’s economic growth at 4.6% in 2019. Despite facing with many disruptors and uncertainties, particularly a prolonged trade conflicts between the US and China inflicted damage on global economy and trade since 2018, the Malaysian economy has withstood headwinds to grow by 4.6% in the first nine months of 2019. Nevertheless, growth momentum had moderated from an annual rate of 4.9% in 2Q 2019 to 4.4% in 3Q as domestic demand cooled (to 3.5% in 3Q 2019 from 4.6% in 2Q 2019 and 6.8% in 3Q 2018). Adding to growth pressure was continued sluggishness in exports, which had contracted by 2.1% in Jan-Nov. For the full-year of 2019, GDP growth is estimated to increase by 4.6%, which is a shade lower than 4.7% in 2018 but 1.1 percentage points lower than 5.7% in 2017.
- Domestic demand remains key pillar of the economy. Weighing on cautious global growth estimates of 3.2%-3.4% in 2020 (IMF’s estimated 3.0% in 2019), the Malaysian economy is expected to grow by 4.5% in 2020. Domestic demand, especially private consumption will be calling the shots, albeit slower as there remains considerable uncertainty about private investment. The 2020 Budget’s 4.3% increase in development expenditure to RM56.0 billion in 2020 should help to provide partial support to the domestic economy. What matters most is to execute effectively the Budget’s programmes and initiatives; and to disburse the funds timely for the implementation of projects.
- Consumer spending to normalise on cautious sentiment. Private consumption is estimated to pace slower to 6.7% in 2020 from estimated 7.2% in 2019, which is normalised towards its long-term growth of 7.0% per annum in 2011-2018. The estimated rise in unemployment rate of 3.3%-3.4% and moderate salary increment (between 4.5%-5.0%) and bonus pay-out and still-high consumer debt are expected to see some pullback in discretionary spending. Nevertheless, RM5.0 billion cost of living aid would provide partial buffer to targeted low- and middle-income households and individuals. The Government has deferred the implementation of the targeted fuel subsidy scheme, which is slated to roll out on 1 January 2020.
- Strong revival in private investment growth is needed. The biggest challenges facing the Malaysian economy is the fast slowing growth of private investment. The growth rate has been losing steam in recent quarters to 0.9% in the first nine months of 2019 and likely to end the year much lower at 0.8% (4.3% in 2018 and 9.0% in 2017), the slowest pace in nine years after contracting by 7.4% in 2009. For 2020, we expect private investment to remain cautiously weak, growing by 2.2% as investors stay on side lines on wary about external environment and broader domestic political development, including the leadership transition and policy uncertainties.
- Growth in private investment has remained weak primarily due to concerns related to uncertain external environment, challenging domestic business condition, regulatory challenges as well as the lack of policies clarity continue to weigh on investors’ confidence.
- The danger is that the persistent pull back on capital spending would take much of the steam out of the economy going forward and undermine capital formation. There are also worries that weak business investment and challenging economic conditions could constrain companies’ ability to continue hiring more workers, and undermine consumer spending.
- Exports to recover gradually. Dampened by slowing global demand, especially for electronics and electrical products and also disrupted by a prolonged trade conflicts between the US and China, exports contracted by 2.1% in Jan-Nov. We expect exports to recover gradually in 2020 with an estimated positive 2.0% growth as against a decline of 1.5%-2.0% in 2019. The expected improvement in exports will be supported by (a) easing trade tensions will help to stabilise global trade; (b) the deployment of 5G will be the main factor propelling a moderate recovery in the semiconductor sector, especially the wireless technology industry; and (c) higher commodity and crude oil prices.
- Inflation expectations will be higher in 2020 as fuelled by a managed floating of fuel prices on a gradual basis, a planned upward adjustment in water tariffs nationwide, higher minimum wage as well as higher private medical consultation fees. We expect the Government to eventually implement the targeted fuel subsidy scheme, which is originally planned for implementation on 1 Jan 2020. Overall headline inflation, as measured by Consumer Price Index (CPI) is estimated to increase by 2.0% in 2020, markedly higher from estimated 0.7% in 2019.
- Bank Negara Malaysia keeps its monetary option open. While the economy will get some fiscal spending boost from 2020 Budget, but if global growth fails to stabilise or trade conflict uncertainties remain entrenched, monetary policy may need to reinforce and secure growth amid contained inflation expectations. Bank Negara Malaysia is expected to keep door open to modest monetary easing, probably 25 basis points cut in the overnight policy rate to 2.75% by 1H 2020 if the economy slows materially to say, around 4.0%.
- Weighing on tailwinds for the ringgit. The ringgit ended the year 2019 at RM4.0925 per US dollar, a small appreciation of 1.1% from end-2018 (RM4.1385). The phase one trade deal between the US and China has aided to improve investors’ sentiment as well as alleviate downward pressure on global economic and trade conditions. Fading recession risk and easing trade tension serve as a tailwind for open and trade-dependent Asian economies, including Malaysia while boosting the prospects of exports rebound. Still, any negative surprises from a trade truce negotiation, commodity prices volatility and geopolitical uncertainties could influence the ringgit’s outlook. Domestic macroeconomic conditions, fiscal outlook and current account position of the balance of payment remain the primary drivers of the ringgit’s performance. In 1Q 2020, all eyes are on the FTSE Russell’s review on Malaysia’s bonds’ inclusion in its World Government Bond Index (WGBI), the US Treasury’s next review of Malaysia in the Monitoring List on currency practices and domestic macroeconomic policies.
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