Economists rule out possibility of Malaysia slipping into recession

KUALA LUMPUR: Economists have ruled out the possibility of the country slipping into a recession as the domestic economy is still expanding with macro indicators staying positive.

Malaysia's gross domestic product (GDP) growth decelerated to 4.5% in the second quarter this year (2Q18), compared with 5.4% in the previous quarter and 5.9% in the final quarter of last year.

Last Friday, Bank Negara Malaysia cut its forecast for GDP growth this year to 5.0% from 5.5% to 6.0% previously, given the slower-than-expected expansion in the second quarter.

MIDF Amanah Investment Bank chief economist Dr Kamaruddin Mohd Nor told SunBiz that the pace of economic growth will be influenced by various supply and demand driven factors, noting the disruption in gas production and crude palm oil dragging overall growth in 2Q18.

Thus, he said, the GDP performance in the second half of 2018 (2H18) is expected to be better than the 4.9% average recorded in the 1H18 mainly driven by domestic consumption.

“Investment from private and public sector will also pick up in 2H18,” Kamaruddin said.

Meanwhile, Malaysian Institute of Economic Research (MIER) senior research fellow Dr Shankaran Nambiar said he does not expect the economy to do too well this year, setting his overall growth projection for 2018 at 4.5-5.0%, on expectations of more prudent management of the economy by the government.
Factors that could slow down GDP growth, according to him, include the rescaling of expenditure on investments and infrastructure projects.

“With these projects being pulled backed, the multiplier effects will be lost. The switch from the goods and services tax (GST) to the sales and services tax (SST) again involves costs to businesses, especially small and medium enterprises. The revenue that will be collected will be lower. However, this was part of the manifesto and the government is committed to accomplishing its promise. The government's argument was that the tax burden on the B40 should be reduced,” he said.

Noting that while cutting back infrastructure projects is a necessary part of the cost of transforming the economy, one can also expect the government to work out new tax schemes to raise revenue in the year ahead, which is likely to be seen in the upcoming Budget 2019. This is, however, not expected to burden the B40 (bottom 40% of household income) group.

“As a counter-balance to the cut in projects, the government will surely design pathways to reinvigorate the industrial and services sectors. The government can be expected to take a more proactive stance to developing the economy after having dealt with the mismanagement arising from 1MDB and other such ventures.

“Another supportive feature is the exuberance felt by consumers and businesses. This should help drive domestic demand and compensate for any weaknesses in exports,” Shankaran explained.

RAM Ratings said it revised down 2018 GDP growth for Malaysia to 4.9% from 5.2% on the back of robust private consumption and slowing import activity.

The rating agency forecasts the headline inflation to stay subdued at 1.3% on the back of a sizeable downward pull from GST-zerorisation, the reinstatement of fuel subsidies as well as a lower-than-expected contribution from food inflation this year.

In view of the lower core inflation trajectory and moderating growth, RAM said, there seems to be some downward bias for the Overnight Policy Rate (OPR) this year.

“However, our base case is still for the OPR to stay put at 3.25% for the rest of the year, as we feel that lingering policy uncertainties and macro risks may continue to pose some capital outflow bias,” it added.

Meanwhile, Bank Negara Governor Datuk Nor Shamsiah Mohd Yunus said the slower pace in the second quarter was attributable to commodity supply shocks in the mining as well as agriculture sectors that led to supply disruptions.
Growth in the mining sector contracted due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather conditions.

On the supply side, major economic sectors, namely the services and manufacturing, remained the key drivers of growth.

Overall, Shamsiah said, Malaysia's macroeconomic fundamentals remain strong, providing the country with the requisite buffers to effectively manage potential shocks to the economy.

Commenting on developments in Turkey, the central bank chief said Malaysia's economic exposure to the crisis-hit country is rather small, noting that corporate debt exposure to Turkey is only at about 0.17% of total corporate debt.

“And in terms of the exposure to the Turkish lira denominated volumes is even smaller, at 0.03% of total corporate external debt,” she added.

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