KUALA LUMPUR: Private consumption — the key driver of economic growth in the last couple of years — is expected to face headwinds this year, arising from the higher cost of living as a result of cost-driven inflation, spillover effects of the ringgit’s depreciation on imported goods and services, and weak consumer sentiment.

This is despite the fact that the first quarter of 2017 (1Q17) saw a better export performance, partly attributable to seasonality and the weak ringgit effect, and a healthy pace of industrial production growth.

“Consumer sentiment remains cautious and weak, weighed down by rising inflation pressures and continued worries about job prospects,” said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

“Despite the higher cash handout, sentiment on the ground has been pretty weak, especially with the rising cost of living, affected by the weaker ringgit,” Lee told a press conference yesterday on the economic trend in 1Q17.

Private consumption grew by 7%, 6% and 6.1% in 2014, 2015 and 2016 respectively, and SERC is expecting growth to moderate to 5.7% in 2017 on cautious sentiment, higher inflation, higher living cost and lower purchasing power.

With domestic demand being the main driver of growth for the country, the over-reliance on it in the last couple of years has resulted in a weakening of consumer sentiment.

Malaysian Institute of Economic Research’s Consumer Sentiments Index (CSI) also noted the weak consumer sentiment, with the 4Q16 CSI slipping further south to 69.8, below the demarcation level of 100 points.

Standard Chartered Bank, in a report dated March 28, came to the same conclusion.

“Household consumption may ease relative to 2016. One-off measures to support consumption helped in 2016, but an unfavourable base effect will kick in from the second half of 2017. In addition, the labour market appears to be softening — the unemployment rate was relatively high at 3.5% in December 2016, and employment growth was just 0.6% year-on-year.

“We estimate wage growth at 3.2% in December [using the wholesale, retail and manufacturing sectors, which account for about 17% of employment, as proxy]. But with inflation rising strongly, real wage growth may be lower this year than in 2016,” said Standard Chartered.

SERC’s Lee said that if consumers demand for higher wages — with their income eroded by cost-push price factors amid a weakening ringgit — the higher wages would lead to a second-round demand-pull consumer price increase.

On a possible demand-pull inflation risk, United Overseas Bank (M) Bhd economist Julia Goh said that while the risk is there, it is unlikely to happen, given the lacklustre job growth in the market currently.

Goh agreed with Lee that private consumption will face more hurdles from the rising cost of living, and that Malaysians have to look for alternative jobs to supplement their main income in order to maintain their lifestyle.

Both Lee and Goh were also more optimistic about the recovery in exports.

“Exports have staged a recovery since mid-2016, driven by improved global demand, tech demand as seen from the rising sales of global semiconductors for the last six consecutive months and higher commodity prices,” Lee said.

Goh added that the improvement in commodity prices such as crude palm oil and crude oil will no doubt help to lift exports in 2017.

SERC forecasts crude oil prices to be in the US$55 (RM243.65) to US$60 per barrel range, and palm oil prices at about RM2,700 per tonne in 2017.

While exports may provide the silver lining, Lee cautioned that US President Donald Trump has signed executive orders aimed at identifying and targeting foreign trade abuses.  Malaysia is among  16 countries that have big trade surpluses with the US.

Lee, however, pointed out that the entire process will take some time to take effect and there is no indication of US policies moving forward.

Another economist, who preferred to remain anonymous, pointed out that the risk in trade with the US has increased following the executive orders. He said that while Malaysia’s international trade and industry ministry has commented that Malaysia is not taking advantage of the US in bilateral trade, the Trump administration may have a different view.

“Although the bulk of Malaysia’s exports to US are electronics manufactured by American companies in Malaysia, the US government could look at the matter differently.

“We know that Trump has talked about creating jobs for Americans and how he wants to bring overseas jobs back to the US,” he said, adding that Washington may accuse Malaysia of taking advantage of the low production cost here.

“Nonetheless, it’s still too early for us to know the impact. For Malaysia, being an open economy, if the US were to act on policies affecting trade, it will definitely hurt us, one way or the other,” he said.

SERC is maintaining its forecast of a 4.3% economic growth for Malaysia in 2017, supported by a continued, albeit slower, expansion of domestic demand as well as better export growth.

The think tank also expects Bank Negara Malaysia to hold the overnight policy rate at 3% and only resort to reducing the rate if real gross domestic product is seen to be under threat.