Factors that will impact the domestic economy, from China to the general election
What does 2018 hold for the Malaysian economy? Major central banks are starting to raise interest rates while President Donald Trump’s America First policy not only promises more rumblings on the global political stage but also repercussions for global trade. Commodity prices are expected to rise, therefore costs for both consumers and companies will go up.
Analysts at Nomura Research expect Asia’s sweet spot of solid growth, strong capital inflows, tame inflation and low interest rates to stretch into 2018 but warn of rising risks from higher credit costs and slower exports growth.
For Malaysia, the research house expects stable, albeit slower, growth and views the country as the clear-cut winner from higher oil prices. Also, higher oil prices will lead to larger trade and current account surpluses.
These issues are just some of what the economy will face as the old year wanes and the new year waxes. They are by no means new but are a continuation of factors that have had an impact this year and will continue to shape the economy this year.
What is new will be the intensity and impact certain trends will have on the economy. The Government’s assumption is for gross domestic product (GDP) to grow between 5% and 5.5% in 2018, compared to the revised estimate of 5.2% to 5.7% GDP growth this year.
First up will be monetary policy. The decisions of policymakers will hinge on economic growth and inflation.
The market expects the benchmark overnight policy rate (OPR), which affects Malaysian commercial lending rates and deposits, to be raised at least once for a total of 25 basis points to 3.25%.
Several economists expect the rate hike as early as January when Bank Negara’s monetary policy committee next meets. Others expect the central bank to start raising only in the second-half of the year.
Higher interest rates usually have a positive impact on a currency’s performance but it is not the only factor.
A rate hike or two will mean that the central bank sees demand-pull inflation, a sign that consumers are spending, employment is stable and that the economy is growing sustainably and not just relying on exports or foreign investments.
A commitment to reduce the federal government deficit and overall debt to GDP levels help to instil confidence in investors too.
An OPR hike is also likely to cushion the effects of foreign fund outflows. This will be watched closely as the US Federal Reserve has signalled three rate hikes for 2018 after raising the benchmark federal funds rate three times this year.
An important issue to note is that higher interest rates mean higher bond yields. A rate hike by Bank Negara will help to narrow the yield spread between Malaysian and US bonds.
The growth outlook of the world’s second-largest economy is important because of the trade linkages with Asean. Malaysia is China’s largest trading partner in the region and China remains an important investor, it was the largest contributor to foreign direct investment in 2016.
Chinese contractors are involved in a number of large multibillion ringgit public infrastructure projects, including the RM55bil East Coast Rail Link.
Repercussions will be felt by China’s trade partners as the pace of economic growth slows down next year from the 6.8% estimated by the International Monetary Fund (IMF) for 2016.
Growth will still be hovering around 6.5% but there are worries that the Chinese economy may be weighed down by mounting debt problems, which mean that the move to tighten lending in recent months will continue as part of the wider plan to deleverage.
Higher inflation could also put mounting pressure on the People’s Bank of China to raise interest rates.
If that happens, Chinese firms will be hit hard as, according to the IMF, corporate debt has reached 165% of GDP.
Even Chinese households will come under pressure as debt levels have risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation, the IMF says in a report published earlier this month.
According to the World Bank, exports contributed 67.24% in terms of value to GDP in 2016. In that year, the value of Malaysian GDP was RM1.23 trillion, when taking into account the average US dollar to ringgit exchange rate of 4.142.
This year, exports have performed well on the back of rising consumer demand in the developed markets.
The latest available data show exports continuing to perform strongly but analysts cautioned that increasing talk of trade protectionism coupled with geopolitical concerns could be obstacles to exports growth next year.
Citigroup Inc says focus should be on the exports-driven electrical and electronic subsectors, which make up 35% of total exports.
“Our electronics leading indicator has seen relatively steady momentum in recent months, which points to a supportive backdrop for Malaysia’s tech exports,” it noted, adding that global tech demand remains strong while global tech inventory levels remain lean although it is building up.
All analysts agree that there will be a step up in fiscal pump-priming measures prior to Malaysia holding the 14th general election, which must be called by next August but is most likely to be held in April.
Morgan Stanley Research says private consumption will rise in the period prior to the election.
It points to the feel-good initiatives such as personal income tax rate cuts, special payouts for civil servants and government retirees, cash handouts for Felda settlers, enhancing benefits for employees of government-linked companies and removing specific toll collections that featured in the Budget 2018 tabled in late October.
“In particular, policymakers expect the reduction in personal income tax rates to raise disposable income by RM1.5bil,” it says.
Another important initiative is that in November, the Finance Ministry announced that it is considering measures to ease the burden of middle- and lower-income households should fuel prices exceed RM2.50 per litre for three consecutive months.
“Historically, domestic demand and private consumption momentum tend to accelerate in the run-up to elections (likely because preelection measures) before tapering off thereafter.
“We believe recent policy measures are likely to boost sentiment and support consumer spending, leading to a repeat of such growth patterns around the election cycle once more.
This is so since we think policymakers are likely to refocus on fiscal consolidation efforts post elections to achieve near-balanced budget by 2020,” it adds.
Technology has always been a disruptor, the English textile workers known as Luddites who rioted and smashed machinery used for weaving in the early 19th century did so because they believed they lost their jobs because of new ways of producing clothing.
Fast forward to today, and technology continues not only to disrupt but also transform the way people work, play, live and communicate.
Khazanah Research Inst released a report in late April estimating that more than half of all current jobs in Malaysia are at high risk of being affected by automation in the next one to two decades.
“Four out of five of these jobs are semi-skilled.
“It is Malaysians who are most affected, not foreign workers – 90% of all semi-skilled jobs are held by Malaysians,” it said.
Describing the technology displacement on the job market as “quite dire”, it pointed out that advanced economies’ adoption of automation will accelerate Malayasia’s deindustrialisation, which began in 2000, and lower the economy’s participation in the global value chain as well as erode the labour-cost advantage of the manufacturing sector.
While local firms have generally been slow in adopting new technology and automation, there are a number who have done so successfully such as food and beverage manufacturer Nestle (M) Bhd as well as the glovemakers such as Top Glove Corp Bhd
Although acknowledging that technological advances can be potentially very disruptive, Khazanah Research also says that it can bring significant economic opportunities to economic development if harnessed effectively.
Source: The Star