Robust economic growth

But the rising cost of living weighs on sentiment

MALAYSIA’s economic growth has trumped expectations by quite a significant margin.

Beating consensus estimate, the country saw its gross domestic product (GDP) expand at the fastest pace in three years at 6.2% for the third quarter of 2017.

Driven by robust private sector spending and continued strength in exports, the GDP growth pace for the three months to September exceeded the median estimate of 5.7% by 19 economists polled by Bloomberg.

It was also an acceleration from the rate of 5.8% achieved in the second quarter of this year. This higher growth was the fastest rate since the second quarter of 2014.

It also put Malaysia as the third-fastest growing economy in Asean for the third quarter this year after Vietnam (7.46%) and the Philippines (6.9%).

According to Bank Negara governor Tan Sri Muhammad Ibrahim, the strong GDP numbers year to date indicate that the country’s economy is set to meet, or even exceed, the Government’s projection of 5.2%-5.7%.

“Looking ahead, the economy is poised to register strong growth that is close to the upper end of the official target,” Muhammad said.

On a question whether the fullyear GDP growth could exceed the official forecast, given the continued strong performance in the third quarter, Muhammad responded: “It is possible.”

“If it exceeds 5.7%, that will be a pleasant surprise. But we still have to be watchful of external developments,” he told reporters at a briefing on Malaysia’s third-quarter economic performance in Kuala Lumpur yesterday.

The full-year 2017 GDP growth forecast of 5.2%-5.7% was an upward revision by the Government last month from its earlier estimate of 4.3%-4.8% on the back of an increasingly positive economic outlook.

Last year, Malaysia’s GDP grew 4.2%, compared with 5% in 2015.

Muhammad said domestic demand was expected to support Malaysia’s economic expansion through 2017, while on the external front, exports would continue to benefit from favourable global demand conditions.

Despite the optimism, there still seems to be a disconnect between the country’s strong GDP growth numbers and the reality on the ground.

The man on the street in general continue to think that they are not positively impacted by the country’s robust economic growth.

Such sentiment is reflected in the consumer sentiments index published by the Malaysian Institute of Economic Research.

The numbers show that consumer sentiment in Malaysia continues to linger below the optimism threshold of 100 points for 13 quarters in July-September this year at 77.1 points.

Muhammad conceded the fact that many had yet to feel the impact of the country’s strong growth.

“Many people don’t feel the optimism due to several factors such as sustained cost of living pressures, concerns over employment opportunities and high debt obligations, which are all affecting vulnerable households the most,” Muhammad explains.

He noted that while income growth had increased in recent years, wage levels remained low amid higher expenditure. Households in the Bottom 40 group, in particular, faced larger increase in expenditure relative to rise in income, as wage increases for low to mid-skilled workers were relatively low compared with that for high-skilled professionals.

Nevertheless, Muhammad points out that the Government was already working to address the concerns of the people.

“Our concern is more on totality, which includes creating better economic policy that create better paying jobs in the industry.

We need to work at it in totality – we need to have economic policies that can create better-paying jobs and promote industries that can add value to the economy,” he says.

Similarly, economist Lee Heng Guie said it was important to address issues affecting the public so that the poor sentiment would not overshadow Malaysia’s growth story.

“Hopefully, the strong economic performance year to date will help to uplift businesses and consumers to feel more confident about the economy. High cost of living and rising prices of essential goods and services as well as inflation expectations have taken some ‘feel good’ effects from the strong economy narrative,” Lee, who is the executive director at local think tank Socio Economic Research Centre, says.

According to Lee, Malaysia’s economic and financial fundamentals would support continued expansion of the country’s economic growth in 2018.

While he expected the country’s economy to end the year 2017 on a high note, he says the pace of GDP growth would likely normalise to around 5.1% due in part to technical high-base effect.

“Lingering uncertainties ahead of the General Election 14 and the expected changes in Bank Negara Malaysia’s monetary course could somewhat dampen sentiment. External conditions also warrant close monitoring,” Lee says.

Malaysia’s economy thus far remains largely driven by domestic demand.

For the quarter in review, domestic demand grew 6.6%, supported by supported by continued expansion in both private sector expenditure (7.3%) and public sector spending (4.1%). The external sector also contributed positively to growth, as real exports expanded at a faster pace (11.8%), supported by stronger demand from major trading partners.

On the supply side, growth was supported by continued expansion across all sectors, particularly services and manufacturing.

Malaysia’s surprisingly strong third-quarter growth would likely prompt some economists to upgrade their outlook for the country.

Singapore-based Nomura Holdings Inc economist Euben Paracuelles, for one, noted the possibility of Malaysia’s GDP growth exceeding its 2017 and 2018 forecasts of 5.5% and 5%, respectively.

“Overall, we believe the pick-up in third-quarter GDP growth poses upside risks to our full-year 2017 forecast... we also see upside risks to our 2018 GDP growth forecast,” Paracuelles wrote in an email.

In addition, he said his currentaccount-surplus-to-GDP projection for Malaysia at 2.2% and 2% for 2017 and 2018, respectively, were also subject to “some upside risks”.

Malaysia’s current account surplus widened to 3.7% of gross national income (GNI) in the third quarter of 2017 from 3% of GNI in the preceding quarter, thanks to a larger goods surplus which offset the higher deficits in the income accounts and sustained deficit in the services account.

The improving economic conditions in the country and globally raised expectations of an interest rate hike by Bank Negara next year.

Some economists expected the central bank to increase the benchmark overnight policy rate (OPR) by 25 basis points (bp) to 3.25% as early as January 2018.

“We believe Bank Negara will view the strong third-quarter GDP print as opening a window to normalise its accommodative monetary policy stance,” Paracuelles says.

To that, Muhammad says the central bank would continue to assess the balance of risks surrounding the outlook for domestic growth and inflation to ensure that the monetary policy would support the sustainability of Malaysia’s growth prospects.

He says Bank Negara would adjust the OPR, which commercial banks refer to in pricing their lending rates, accordingly once “growth is entrenched”.

“This will be when the economic expectations are positive, inflation is within what is expected, financial imbalances do not increase significantly or becoming a problem... this will give a bit of flexibility to adjust to a degree of monetary policy competitiveness,” Muhammad explains.

He notes that the potential hike in the prevailing OPR of 3% would not be a “tightening”, but rather “a normalisation of interest rate”.

Pointing to influence of US interest rate movements, Muhammad says, “the US authorities had indicated the normalisation of the interest rate and a few central banks had adjusted to the situation.”

“Globally, every one has to adjust to the sentiment but if you are in the position of strength like in Malaysia where our growth is quite strong, we have more flexibility in looking at our policy to adjust,” he adds.

The central bank last raised the OPR in July 2014, when the rate was increased by 25bp to 3.25%. This was later slashed to 3% in July last year to support domestic economic activities amid rising external uncertainties. The next OPR review would be held in January 2018.

The rate would be changing depending on inflation and economic growth.

Bank Negara expected Malaysia’s headline inflation, as measured by the increase in consumer price index (CPI), to average at the upper end of the forecast range of 3%-4% this year.

CPI growth moderated to 3.8% in the third quarter of the year on lower transport inflation. This brought the year-to-date inflation to 3.7%. “Due to strong economic growth, averaging 5.86% for the last three consecutive quarters, we view there is a room of possible rate hike in 2018. Moreover, inflationary pressure coming from uptick in fuel-related prices and further normalisation of monetary policy in developed economies are also factors for the possible rate hike next year,” MIDF Research says.

Ringgit strength

Meanwhile, Bank Negara is of the view that the recent strengthening of the ringgit was a better reflection of Malaysia’s economic fundamentals and sound policy measures.

“The strengthening of the ringgit is a reflection of the measures Bank Negara took in November 2016 and March 2017,” Muhammad says, in reference to the central bank’s intervention in the foreign exchange market by introducing several initiatives, including measures to curb the offshore non-deliverable forward market, to tackle speculative activities.

“The strengthening of the ringgit is now more reflective of our economic strength,” he notes.

He adds that sound policy measures had resulted in the ringgit strength being supported by more liquidity in the market, while the influence of speculative play continued to diminish.

“Ringgit volatility has declined and the local currency has been one of the best performers in the region for two consecutive quarters,” Muhammad says.

While ringgit remained supported by positive domestic developments, Muhammad cautioned that there were still persistent risks that could affect the value of the local currency.

Buoyed by the higher price of crude oil and rising prospect of an interest rate hike happening next year, the ringgit was quoted at its strongest level in more than a year against the US dollar at 4.164 yesterday.

This compared with 4.497 against the greenback in the beginning of this year.

Year to date, the ringgit has strengthened 7.74% against the US dollar.