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A. WORLD ECONOMIC OUTLOOK UPDATE
COPING WITH A DUAL SHOCK
Global recovery continues in 2022, but still facing multi-faceted risks ahead. After two years of raging pandemic impact, the global economy continues to recover, but still facing multitude shocks. Amid uneven pace of vaccinations worldwide and the virus still lurking round the corner, the global economy has not fully recovered from the COVID-19 pandemic-triggered recession and deep scarring. Many consumer and economic sectors are still in the healing process amid persistent consumer inflation and business cost pressures.
The prolonged supply chain disruptions, first round of price increases and rising business costs due to higher energy and commodity prices as well as input, material and logistic costs were further worsened by Russia’s invasion of Ukraine-induced massive negative supply and price shocks.
Persistent high inflation and oil price shocks represent a double-blow to the world economy by further denting global growth prospects and driving higher inflation at a time when inflation expectations are already becoming unanchored in some advanced economies.
Barometer for Q1 2022 suggests slowing momentum. Global PMI for March reported that global manufacturing production recorded the slowest rate of expansion in 18-month as persistent disruptions on supply chains, rising inflationary pressures and Russia-Ukraine conflicts hampered output and demand.
The US economy will slow due to disappearing of favourable base effects as elevated price pressures and tighter monetary policy as well as sanctions on Russia will weaken consumer sentiment and spending. In Eurozone, the surges in energy and food prices triggered by the Russia-Ukraine war are hitting consumers’ purchasing power and causing supply disruptions to businesses. Harsh economic sanctions on Russia and its counter retaliation would hit the European economies as they purchase 25% of oil and nearly 40% of gas from Russia.
Japan’s economic prospects weakened heading into March as surging COVID-19 cases led to widening lockdowns across the country, and the Russia-Ukraine war has led to much higher global commodity prices, and could feed into domestic inflation. China's economic slowdown has deepened in 4Q 2021, will be further dampened by the slowdown in the property market, crackdown on risky debt and the continuation of the "zero-COVID" strategy.
Global stagflation pressures are now a serious risk. This scenario of global stagflation-induced recession is a worrying policy risk for the US Federal Reserve and other central banks as they face a delicate balancing act to contain the strongest price pressures in decades without derailing the economy. Policy missteps by the central banks would be costly and detrimental to the global economy.
To act or not to act tough on inflation? With inflation is rising and de-anchoring inflation expectations, the central banks are already behind the curve. If the central banks delay the interest-rate hikes or opt to slowly tighten the pace of monetary policy to save growth, this will accelerate the pace of inflation expectations and exacerbate stagflation. The US Fed has already hiked interest rate in March, and will continue to maintain hawkish stance to tame rising inflation.
Investors are deeply concerned about a looming recession in the US economy due to the Fed’s resolve to reduce inflation through aggressive interest rate hikes combined with the impact from the supply and oil price shocks. We have seen the Fed’s hawkish moves to stem a surge in inflation pressure has caused severe recessions during the first and second oil-price shocks in 1973-74 and 1978-79 respectively.
Multi-faceted headwinds to the global economy. The risks to the global economy remain tilted to the downside: (a) The COVID-19 variants – The World Health Organisation (WHO) said that a more dangerous variant of concern than Omicron could be lurking round the corner though it sees a likely case that the severity of disease would wane over time due to greater public immunity; (b) Elevated inflation and cost pressures; (c) Aggressive interest rate hikes and the associated risk of policy missteps; (d) Prolonged escalation of Russia-Ukraine war; (e) Climate change; and (f) Geopolitical tensions, trade and technology conflicts, especially between the US and China.
B. MALAYSIA ECONOMIC OUTLOOK UPDATE
IS MALAYSIA IN MULTITUDE SHOCKS?
A year of recovery in 2022 amid downside risks to the growth outlook. We concur with Bank Negara Malaysia’s latest assessment that Malaysia’s economic recovery remains on track in 2022, supported by continued global growth, a revival in domestic demand and the reopening of our international borders.
Maintained our 2022’s GDP growth estimate at 5.2%. Amid the reopening of international borders starting 1 April 2022, we are keeping our GDP estimate of 5.2% in 2022 (3.1% in 2021), underpinned largely by a sustained rebound in domestic demand, especially private consumption and public spending. Our estimate fall slightly below Bank Negara Malaysia (BNM)’s estimate of 5.3%-6.3% for 2022.
High frequency data show continued economic recovery in Jan-Feb, albeit unevenly: (a) The Leading index in January 2022 suggests slowing economic growth in the months ahead amid the headwinds; (b) Industrial production growth also paced at a slower rate of 4.3% yoy in January (+5.9% in December 2021) due to slower manufacturing output (+6.8% vs. 8.4% in December) and continued decline in mining output; (c) Exports continued to grow by 16.8% in February, albeit lower compared to 23.9% in January; (d) Banking system’s outstanding loan growth was stable at 4.7% in February. Household loans continued to expand by 4.7%, reflecting broadly sustained growth across most purposes. Businesses’ outstanding loan growth increased by 5.5% in February (5.3% in January) amid higher lending to SMEs and sustained growth in working capital loans.
Domestic demand will anchor the recovery in 2022. While SERC revises higher private consumption growth estimate to 6.5% in 2022 from 5.9% previously, it is lower than Bank Negara Malaysia’s estimated 9.0%.
While we reckon that pent-up demand, cash handouts and the fourth round of EPF withdrawal will support consumer spending, but the repairing of impaired households’ balance sheet and rebuilding of depleted savings as well as the pick-up in inflation will mean prudent discretionary spending. Higher inflation and cost of living concerns will crimp the households’ disposable income (purchasing power) and dampen consumer sentiments. In addition, the expected gradual improvement in the labour market condition (estimated unemployment rate at 4.0% in 2022 vs. 4.6% in 2021) and moderate increases in income would restrict spending.
We expect private investment to remain cautiously this year due to increased operating costs, supply disruptions, rising material costs as well as the shortage of workers amid the on-going Russia-Ukraine war. Private investment is estimated to pick up moderately to 5.0% in 2022 from 2.6% in 2021, which is in line with BNM’s estimate of 5.3%.
A strong rebound in services sector. The services sector will regain the strongest growth estimated 6.1% in 2022 (1.9% in 2021), mainly due to the revival in domestic demand on the anticipated rebound in tourism and related services sectors, thanks to the reopening of international borders. The anticipated tourists’ arrival will be gradual with the Ministry of Tourism, Arts and Culture targets of two million international tourist arrivals and RM8.6 billion tourist receipts this year. The manpower shortages and increased operating costs would dampen the revival of hospitality sector.
The manufacturing sector will grow at a moderate pace (estimated 4.8% in 2022 vs. 9.5% in 2021), backed by the continued demand of electronics and electrical products as well as recovery in domestic market industries such as construction building materials. But, the shortage of workers and supply disruptions would dampen the sector’s expansion.
The construction sector will rebound to grow by 6.5% in 2022 from -5.2% in 2021 following the resumption of construction activities related to residential and commercial development. The implementation of on-going public infrastructure projects such as ECRL, MRT 2, Pan Borneo Highway and Johor Bahru–Singapore Rapid Transit System (RTS) as well as the small projects under the 2022 Budget will support the growth of civil engineering.
We caution that increases in building materials and other operating costs such as logistics, utilities and labour costs (due to the shortage of workers) have impacted the cost of construction. Building material price fluctuations represent a profound and lasting risk to construction projects. These fluctuations are not only causing unanticipated spikes in construction costs, but are also threatening to delay the projects’ completion dates due to material rationing or unavailability.
- The external sector will have a moderate impact on the economy. Our revised higher exports growth estimate to 5.9% in 2022 from 1.8% previously (26.0% in 2021) is lower than 10.9% estimated by BNM.
While the continued external demand of electronics and electrical products, rubber products, wood products as well as higher commodity and crude oil prices are expected to sustain positive growth, but a slowdown in the global economy due to inflation, tighter global monetary, Russia’s invasion in Ukraine, the prolonged continued supply chain disruptions, higher inputs and business costs as well as the worker shortages would dampen exports.
Headline and core inflation will move higher. Headline inflation moderated for the third straight month to 2.2% yoy in February (2.3% in January) due to slower transportation inflation. Food and non-alcoholic beverages price inflation accelerated to more than four-year high of 3.7% (from 3.6% in Jan), due to higher food inflation at home and food away from home. Recreation services & culture price inflation also increased higher (1.6% vs. 1.2% in January), reflecting the reopening of economic and social activities.
Core inflation, which covers all goods and services except for volatile items of fresh food and government-controlled prices paced higher to 1.8% in February from 1.6% in January.
Consumer price pressures come from the pass-through effect from rising non-energy commodity prices, which have exerted price pressures on food and services. Fuel inflation is contained by the price ceiling on domestic retail fuel prices. However, continued increases in cost of production, as measured by Producer Price Index, which up 9.7% yoy in February 2022 could result in some pass-through of increased costs onto consumer inflation ahead. The sustained high global crude oil prices and non-energy commodity prices remain a wild card amid the implementation timing of the fuel subsidy rationalization.
SERC estimates headline inflation to increase by 3.0%-3.5% in 2022, higher than BNM’s estimated between 2.2% and 3.2%.
Bank Negara Malaysia to maintain a delicate balancing act between growth and inflation. Policy rate adjustments will be gradual and measured. Bank Negara Malaysia indicates that the interest rate policy will be data dependent, and any adjustment in policy rate will be gradual and measured so as not to disrupt the recovery pace.
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