Consumer, business sentiments hitting new highs — MIER

This article first appeared in The Edge Financial Daily, on July 20, 2018.
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KUALA LUMPUR: Expectations of higher income, greater employment and low inflation catapulted Malaysia’s consumer sentiment index (CSI) to a 21-year high of 132.9 points in the second quarter of 2018 (2Q18), says the Malaysian Institute of Economic Research (MIER).

This marks the first time in four years that the index has breached the 100-point optimism threshold.

“The biggest increase stemmed from the expectations component, boosted by the recent change in the political landscape as well as the abolition of the goods and services tax (GST),” said MIER.

Its survey showed that 39% of the respondents, an all-time high, were hopeful that their income would improve in the second half of 2018, with a 14-year low of  6% responding negatively.

Consumers were also excited about the near-term labour market, said MIER in a report yesterday.

“A majority of 41% believed that more jobs will be available soon, the highest since 1Q13. The 9% who responded otherwise is also the lowest in almost 18 years,” it said.

Besides that, inflationary expectations were also revealed to be at an all-time low. “Only 24% of interviewees said they will be balking at higher prices soon, in sharp contrast to the 50% to 92% of responses obtained since the inception of this survey in 1998,” said MIER.

The report concluded that a record high of 43% of the respondents were of the opinion that 2Q18 was a good time to buy or invest in major consumer durables.

However, it is unclear how far the buoyant sentiment is due to the current tax holiday Malaysians are enjoying, MIER executive director Prof Dr Zakariah Abdul Rashid said at the institute’s 33rd national economic briefing yesterday.

“Consumers may have been overreacting after the general election [held on May 9],” he said.

MIER cautioned in its report that much will depend on the sales and services tax (SST) that will be implemented on Sept 1. The finance ministry has announced that the rate will be 10% for goods and 6% for services.

“Keep in mind that these sentiments are [recorded] on a quarterly basis, so you cannot look at these numbers as long-term expectations. They might change positions by the next quarter,” said Zakariah.

Meanwhile, businesses also shared this upbeat outlook in the second quarter as MIER’s business conditions index hit a three-year high at 116.3 points. This was driven primarily by new domestic orders, higher investments and higher expected production and export sales in the next quarter.

“The environment shown by manufacturers is very encouraging,” Zakariah said.

Domestic and export orders inched up, production accelerated, investment spending rose and the rate of capacity utilisation increased over the quarter, MIER’s survey showed.

The outlook is set to remain positive in the coming months, with further expansion in export numbers expected, although local sales are expected to deteriorate and there will be upward pressure on prices in the next quarter, MIER said.

MIER senior research fellow Dr Zulkiply Omar opined that the mismatch between the exuberant consumer sentiment and cautious optimism shown by businesses is due to the fact that businesses are more organised and systematic in their thinking. However, as with the CSI, MIER warned that businesses’ sentiments might change position by the next quarter.

MIER was not the only one seeing a surge in business optimism as the International Business Report by Grant Thornton also showed that business confidence in Malaysia climbed by 24% to register at 52% in 2Q18.

Grant Thornton Malaysia said Pakatan Harapan’s victory in the 14th general election contributed to the surge. “The new emphasis on accountability and transparency has contributed to the newfound business confidence,” said its country managing partner Datuk NK Jasani in a statement yesterday.

The report found that Malaysian business owners are confident about business performance over the next year, with many having positive outlooks for revenue, employment and also investments.

Ringgit to fall to 4.18-4.20 by end-2018 MIER also said that external factors are expected to weaken the ringgit to between 4.18 and 4.20 against the US dollar by the end of this year.

The main factor behind this is capital flows, which are expected to be driven by factors such as interest rate differentials, said Zakariah.

Zulkiply said that the normalisation of interest rates as well as shifting trade flows would result in weaker demand for the ringgit.

“You also have the dollar strengthening,” he added.

Speaking to reporters, Zakariah also shared his view that the SST will result in a one-off increase in prices when it is implemented in September.

While the quantum of the increase remains to be seen, it is important to note that the tax will not be as broad-based as the GST. On top of that, the full burden of the SST may not necessarily be borne by the consumers, Zakariah added.

He opined that move from GST to SST will not negatively affect the fiscal deficit, nor the institute’s growth forecast for national gross domestic product.

“There will be a loss of revenue from tax collection but the fiscal deficit is still achievable because it is influenced by two factors. Even though the tax revenue has decreased the government is also taking actions to reduce expenditure, so the deficit can be maintained,” Zakariah said.

The previous federal administration had set a 2.8% fiscal deficit target by the end of 2018.

Zakariah opined that the new government’s more prudent fiscal management is, on the whole, positive for the country. Although lower government spending would affect the contribution of total investments to growth, the private sector may pick up some of this slack, he said.