Malaysian Economy: Domestic demand underpins healthy growth of 4.3-4.8% in 2017

Malaysian Economy: Domestic demand underpins healthy growth of 4.3-4.8% in 2017

Malaysian Economy: Domestic demand underpins healthy growth of 4.3-4.8% in 2017

The Malaysian economy is projected to register growth of 4.3% - 4.8% in 2017 (2016: 4.2%), underpinned by continued growth in domestic demand, helped along by an  improving global economy, according to Bank Negara Malaysia’s annual report for 2016.

The central bank said domestic demand continues to be the main driver of growth, primarily because of private sector activity. Reflecting the Government’s commitment to fiscal consolidation, the contribution of public sector to growth is expected to remain moderate while going forward.

Nevertheless, public sector expenditure will remain supportive of growth. On the external front, export growth is expected to recover gradually, in line with the improvement in global growth.

Private consumption to expand

Private consumption is projected to expand by 6.0% in 2017. While households are likely to make further expenditure cuts in response to rising inflation, consumption spending is expected to remain, supported by a stable labour market and continued wage growth.

Table 1: Real GDP by Expenditure (2010=100)

The implementation of selected Government measures is also expected to increase household disposable income. These measures include the higher amount of Bantuan Rakyat 1Malaysia cash transfers to poor households, reduction in employees’ contribution to Employees Provident Fund by 3 percentage points until December 2017 as well as the special assistance to all civil servants (RM500) and retirees (RM250).

The higher commodity prices are also expected to support incomes, particularly for rural households. In an environment of moderate growth and cautious business sentiments, labour market conditions are expected to remain soft in 2017.

While employment is expected to remain expansionary, job growth will not be sufficiently large to absorb new entrants to the labour force, causing the unemployment rate to edge higher (3.6% – 3.8%)

Nevertheless, domestic demand and a gradually improving external sector are expected to lend support to the labour market, and wages are expected to continue growing at a moderate pace.

The Malaysian Employers Federation (MEF) annual survey reports that employers expect salary increments to average about 5.4% in 2017 (2016: 5.5%). Wage growth is likely to be supported by the export-oriented manufacturing sector, while wages in the domestic-oriented services sector are expected to expand moderately.

Private investment to grow 4.1%

Private investment is projected to register a modest growth of 4.1% in 2017, as firms are expected to remain cautious amidst continued uncertainty in the economic environment. Nevertheless, private investment will remain supported by implementation of on-going and new projects, particularly in the services and manufacturing sectors.

In the services sector, investment activity will be mainly supported by continued capacity expansion in the domestic-oriented industries, particularly in the telecommunications and real estate sub-sectors.

Table 2: Real GDP by Kind of Economic Activity (2010=100)

Investments in storage facilities will also contribute to investment growth in the services sector. In tandem with the gradual improvement in global growth, investment in the manufacturing sector is expected to be driven primarily by export-oriented industries, especially the electrical and electronic (E&E industries) and resource-based subsectors.

Capital spending in the E&E sector will be supported by the manufacturing of products in the higher-value added segments. Following the improvement in global crude oil prices, mining investment is expected to register a smaller contraction in 2017.

Public consumption growth is expected to register a marginal contraction of 0.2% in 2017, as the Government continues to reprioritise spending and reduce non-critical expenditure. The more prudent spending on supplies and services is expected to weigh on overall growth despite the continued expansion in emoluments.

Public investment is projected to expand by 1.5%, driven by higher capital expenditure by both the Government and public corporations. This reflects the continued implementation of key infrastructure projects in diversified sectors, including in the utilities and transportation sub-sectors, as well as the downstream oil and gas sector.

The improvement in global growth is expected to generate positive spillovers to the domestic economy through the trade, investment and income channels. Malaysia’s export performance will benefit from higher growth among key trading partners and the projected recovery in commodity prices.

Global environment uncertain

Bank Negara said it has become more evident that the global landscape is set to experience concurrent shifts in policy stance, reflecting changes arising from the new US administration and policy shifts after the UK’s EU referendum.

“In this environment, there could be a diverse range of outcomes, with varying implications for the Malaysian economy. In particular, increased protectionism among the major economies would impact and dampen global trade performance.

“The prospect of increasing monetary policy divergence between the US and other major economies could lead to tighter and more uncertain financial market conditions, with higher volatility in capital flows and exchange rates.

“The materialisation of these external risks would be a source of heightened uncertainty for the Malaysian economy and financial system, adversely affecting sentiments and labour market conditions.

“In addition, the persistence of earlier domestic headwinds, such as the higher cost of living and weak sentiments, could also moderate the growth of domestic demand. Malaysia will face these challenges from a position of strength.”

However, the central bank pointed out that the Malaysian economy’s strengths are derived from its highly diversified economic structure, resilient external position and policy flexibility.

“Financial intermediation will remain supportive of growth, underpinned by strong bank balance sheets and a well-developed financial market. Looking ahead, the challenging global environment necessitates continued emphasis on enhancing the nation’s economic resilience and broadening growth sources.

“Efforts are being intensified to rebuild policy space, proactively address potential vulnerabilities and unlock the potential of new growth areas. These structural reforms and pre-emptive policy measures are envisaged to provide greater support to Malaysia’s future growth prospects.”

External sector to remain resilient

Malaysia’s external sector is expected to remain resilient despite continued uncertainties in the global environment. Overall, following the gradual improvement in exports, the net export of goods and services is projected to provide some support to real GDP growth in 2017.

The current account is expected to register a surplus of 1% - 2% of GNI in 2017. Both exports and imports are expected to strengthen in 2017, underpinned by the projected improvements in global growth, commodity prices and sustained domestic demand.

Table 3: External Trade

Given the firm domestic demand, import growth is expected to continue to outpace export growth. This would result in a lower trade surplus. As the largest component of the current account, developments in trade will significantly influence the current account position.

Moving forward, the prospects for trade and the current account will be shaped by three key factors, namely the state of global demand, commodity prices and the strength of domestic demand.

In tandem with higher manufacturing exports, intermediate imports, which form the bulk of Malaysia’s imports, are projected to rise further.

Despite the improvements in global growth, downside risks remain. The projected pick-up in exports could be undermined by weaker-than-expected growth performance of Malaysia’s major trading partners.

“Moreover, the materialisation of more protectionist trade policies in the major advanced economies, and political and policy uncertainties, could have spillovers on the strength of global growth and global trade,” it said.

Inflation higher

Headline inflation is projected to increase in 2017 averaging between 3.0% - 4.0% (2016: 2.1%), reflecting primarily the pass-through impact of the increase in global oil prices on domestic retail fuel prices.

This cost-driven inflation, however, is not expected to cause significant spillovers into the broader price trends, given the stable domestic demand conditions. Underlying inflation is, therefore, expected to only increase modestly.

Global oil prices are expected to be higher in 2017 following the decision by members of OPEC and several other oil producing countries to reduce crude production to ease the glut in global oil supply. “The higher global oil prices, along with the depreciated ringgit exchange rate, will translate into higher domestic retail fuel prices.”

Photo: The Star

admin

Close