‘INFLATION REMAINS TOP CONCERN’
Slower GDP growth likely to limit extent of spending cuts, says Nomura
INFLATION remains a top concern despite the zero-rated Goods and Services Tax (GST) and reinstatement of fuel subsidies, said analysts. Nomura Global Markets Research said the latest poll from Merdeka Center showed the Pakatan Harapan government’s popularity had moderated since it won the May 9 general election, although it remained high at 67 per cent.
Half of respondents chose inflation as the most important issue, modestly lower than 57 per cent in April (pre-election).
“This suggests the perception of inflation may be stickier, and somewhat disconnected from the actual consumer price index inflation readings, which almost halved to a very low 0.8 per cent year-on-year in June from 1.4 per cent in April.”
Nomura said the planned reinstatement of the Sales and Services Tax (SST) would likely keep inflation in the spotlight.
“We believe the government will find it politically challenging to reduce subsidies, having promised to reduce the cost of living, let alone introduce new revenue measures.”
It said a notable slowdown in gross domestic product (GDP) growth would likely limit the extent of any spending cuts to offset the fiscal impact of repealing the GST.
“We reiterate our forecast of the fiscal deficit at three per cent of GDP this year, topping the government’s 2.8 per cent target.
“A further decline in popularity could increase the risk of more fiscal slippage and a sovereign credit rating downgrade.”
AmBank group chief economist and research head Dr Anthony Dass said the second-quarter GDP growth of 4.5 per cent year-on-year was primarily dragged down by commodity shocks from mining and agricultural sectors as well as public investment.
“Nonetheless, the key driver of the economy, which is private expenditure, performed well, reflected by the 5.6 per cent yearon-year growth in aggregate demand, falling in line with our expectation with net exports up 1.7 per cent.”
Given that GDP growth for the first half of this year was five per cent, the research firm lowered its full-year GDP outlook to 4.8 to five per cent from 5.3 to 5.6 per cent previously.
He said the projection for next year had been lowered to five per cent from 5.5 to six per cent previously.
“However, we are not too disturbed with the lower GDP outlook as growth will continue to be supported by domestic activities and exports.
“Hence, we expect the monetary policy to remain accommodative, implying the Overnight Policy Rate will remain unchanged at 3.25 per cent with the full-year inflation hovering around 1.5 per cent.”
Public Investment Bank Bhd said it had projected a full-year GDP growth of 4.8 per cent this year, subject to further information on new fiscal measures.
“We believe the private sector will be resilient enough to pick up the slack while net exports will be able to provide the added push,” it said in a research report.
It said the downside risks to growth remained contained, due to the country’s vibrant and resilient private sector.
It expects subdued inflation for the rest of the year, underpinned by favourable base effect and the small cost pass-through impact from oil prices.
“Domestic developments, such as the zero-rated GST and the implementation of the SST, suggest that inflation is unlikely to rise meaningfully,” it added.