Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on April 10, 2018

KUALA LUMPUR: Think tank Socio-Economic Research Centre (SERC) has revised upward its gross domestic product (GDP) figure for 2018 to 5.5% from the previous estimate of 5.1%, amid signs that the strength of the domestic economy remains intact.

“With improving global growth estimated at 3.9% in 2018 versus 3.7% in 2017, supportive fiscal measures and overall sustaining global demand’s positive spillover on our exports — estimated at 7.5% in 2018 versus 18.9% in 2017 — as well as still positive current and forward industrial production, exports, sales and bank lending, we remain positive on Malaysia’s economic growth prospects,” said SERC executive director Lee Heng Guie in a statement to release its quarterly economy tracker for January-March 2018 yesterday.

“We therefore expect (higher) GDP growth in 2018, mainly to account for firmer domestic demand. That said, technical high-base effects in 2017 will take off some heat from year-on-year growth comparison,” he said.

SERC expects real GDP growth in the first half of 2018 (1H18) to come in at 5.6% before easing to 5.4% in 2H18 as the high-base effect kicks in. GDP grew at 5.7% in 1H17 and 6.1% in 2H17.

Lee sees sustained private consumption at 6.9% this year compared with 7% in 2017 and continued expansion in private fixed investment to 8.3% from 9.3% last year.

“The ongoing projects, including the second mass rapid transit line, the light rail transit 3, the Pan Borneo Highway, PNB 118, Tun Razak Exchange, as well as continued investment in both manufacturing and services sectors will continue to support private investment momentum,” he added.

Still, with an imminent 14th general election (GE14), some cautiousness in investors’ sentiment would prevail on lingering uncertainties pertaining to the outcome of GE14.

“The elections tend to bring surprises that keep consumers and investors on their toes. Their perspectives can have an impact on what happens as we navigate through an often-heated campaign trail. And policies uncertainty can tip the scales in either direction,” said Lee.

On the back of its optimism, the think tank is expecting inflation to rise at a moderate pace this year, after hitting a nine-year high of 3.7% in 2017. It has revised downwards its 2018 inflation rate forecast to 2% to 3% from 3% to 3.5% previously.

“The overall price level is expected to increase at a slower pace this year, partly due to technical high-base effects, reflecting a marked slowdown in fuel prices that led to lower prices of transportation, as well as moderate increase in food prices. For 2018, the risks are fuel price, utility costs, wage growth and firm demand fuelling demand inflation,” said Lee.

Meanwhile, SERC is of the view that the external sector is expected to contribute moderately to overall GDP growth as exports are now estimated to grow at a moderate pace, partly challenged by high-base effects and the diminishing exchange rate revaluation gains.

“US President Donald Trump’s trade policy wild card could put global trade growth at risk,” said Lee.

As in 2017, 2018 does have the potential for some pockets of event risks and market turbulences, some of which could stem from the unpredictable behaviour of Trump and his loyalists. Trade barriers is one of the most closely watched trade policy risks.

“The Fed’s (US Federal Reserve) aggressive interest rate hikes remain a possibility if interest rates were to rise faster. We believe that the US Federal Reserve will continue to be relatively aggressive, raising interest rates between three and four times in 2018,” he added.

Other risks arise from the continued geopolitical tensions in the Middle East and North Korea or some political/election hotspots in Europe and in a multitude of Latin American countries.

Meanwhile, Lee believes the current overnight policy rate (OPR) of 3.25% will remain for a while.

“Our expectation of end-2018 Bank Negara Malaysia’s OPR target is 3.25% to 3.5%,” he said.

On the ringgit, Lee said GE14 may temper investors’ sentiment on the local currency as investors are likely to stay on the sidelines pending the elections’ outcome.

“The key risks counteract the strength of the ringgit is a full-blown trade war among the large trading nations impacting export-oriented economies like Malaysia via global supply chains and the Fed’s more aggressive hikes in the US interest rate, in response to faster-than-expected rise in inflation,” he added.

“We estimate the ringgit to reach between 3.80 and 3.90 against the US dollar by the end of the year, and the fair value to be about 3.60 and 3.70,” he said. The ringgit closed 0.02% higher at 3.871 to the greenback yesterday.

SERC has also raised its 2018 growth forecast for the services and manufacturing sectors to 6% and 5.9% from 5.6% and 5.5% respectively.

      Print
      Text Size
      Share