External risks a speed bump to sustained economic recovery
THE surprise United States election, together with the Brexit referendum, will continue to play a major role in shaping 2017.
The sabre-rattling between Trump and China even before he took office and the threat of trade wars has spooked regional markets.
These events will weigh down on sentiments in the region, particularly until the real aspirations and intentions of president Trump are better understood. The anti-trade stance, at the regional level, could also undermine the alternative plan for the failed Trans Pacific Partnership Agreement.
However, it is also important to note that there is also excitement among some circles, largely from the prospect of greater fiscal spending in the United States and the prospect of deregulation of the US financial and energy sectors.
The Chinese economy continues to bear the possibility of a hard landing. While China continues to grow, helped by aggressive state intervention, there are several red flags about the inherent structural weakness in the system.
There are no appetite for real reform which feeds into medium to long-term risks for growth resulting in contagion risk for Malaysia and Asia.
China’s overheating property market, increasing “zombie firms” and ballooning shadow banking debt are also causes for concern.
Malaysia’s ability to navigate a path of growth in 2017 remains littered with risks. While Malaysia is expected to post a stronger recovery in the first quarter (Q1) of 2017 compared to the second half (H2) of 2016, poor sentiments and external factors has clouded its outlook in 2016.
We expect growth to continue being generated largely by domestic consumption in 2016. Malaysia, like many others in the region, was exposed to the external headwinds swirling from global uncertainties.
Malaysia’s private consumption has proven to be robust in 2016 and we expect Q4 2016 to be no different, albeit at a growth of 5.8% versus 6.4% in Q3 2016.
Exports in Q4 2016 are expected to be dampened due to weakness in commodities and softer external demand but overall, due to a slightly better H2 2016 compared to H1 2016, we estimate our Q4 2016 gross domestic product (GDP) growth to be 4.3%, matching Q32016.
As mentioned, weak business and consumer sentiment have put a slight damper on Q4 2016. We calculate full-year (2016) growth to be 4.2%, within the official forecast of 4.04.5%, with private consumption and investments being the two biggest contributors to 2016 growth.
As for what can be expected for 2017, we estimate growth to be largely generated by an expected 6.6% expansion in private consumption compared to an estimated 6.0% last year.
While consumer sentiments have shown signs of softening and may temper further upside to growth, stable employment condition and decent wage growth, along with government-backed cash hand-out programme under BR1M, would give ample support to private consumption this year.
Meanwhile, exports in 2017 are expected to see some relief with an expected stabilisation of commodity prices and from increased competitiveness due to the weakening ringgit.
Overall, Malaysia is expected to maintain a gradual recovery in H1 2017, as it ends the year with an estimated 4.3% growth for H2 2016, albeit higher than 4.1% in the H1 2016.
Hence, GDP growth is expected to edge higher to 4.5% in 2017 from 4.2% last year, largely from improved domestic demand.
Overall, the economy will take direct cues from what happens elsewhere.
Global financial markets will continue to be roiled by the US Federal Reserves’ indicative three rate hikes this year and how market forces respond to President Trump’s intended mega infrastructure spending, tax cuts for the rich as well gutting regulation for many pillars of the US economy.
Elections are expected in major economies like Germany, France and the Netherlands where observers are closely watching the populist movements which could spur some political changes and inject short-term instability.
Nevertheless, our reading of the landscape is that Malaysia’s growth momentum remains intact for the time being despite the uncertainties.
We calculate GDP growth for Q1 2017 to be 4.4% compared to an estimated 4.3% in the last quarter. Sector-wise, growth is expected to be driven by services, construction, mining and manufacturing.
A pick-up in recovery, however, come hand-in-hand with rising inflationary pressures for 2017. This, along with supply-side considerations – stabilisation in crude oil prices (to US$55 per barrel) and subsidy rationalisation – will see inflation edge upwardsin2017.
We expect inflation to hover at 2.2% in Q1 2017 before rounding off with an elevated 2.5% full-year inflation for 2017. Overnight policy rate (OPR) is likewise expected to remainat3%,atleastforH12017.
Gradual recovery and an uptick in inflation support our view that the odds of an OPR rate cut has largely receded barring unexpected disruptions to Malaysia’s recovery trajectory.
The state of the ringgit continues to be on the radar of investors and the general public alike. We think that Malaysia’s resilient domestic economy could reduce some outflow of capital flight which has made the ringgit one of the worst-performing currencies in Asia.
Bank Negara’s step to curb the trading of ringgit offshore and expand the onshore ringgit market have weakened the currency in the short term but over the longer term, we think these measures could help the authorities with greater controls over its exchange rate mechanisms.
The ringgit, like other regional currencies, will be exposed to more downward pressure with the likely Fed’s three 25 basis points rate hikes in 2017. Investor sentiments continue to be herd-like, with the market anxiously watching global developments, particularly the Trump effect.
We expect that this year, the ringgit could strengthen to around 4.35 by the end of 2017 on stronger exports and a more stable economic environment.
We expect growth to continue being generated largely by domestic consumption in 2016. Kenanga Investment Bank