This article first appeared in The Edge Malaysia Weekly on April 10, 2017 - April 16, 2017

US President Donald Trump is no stranger to ruffling a few feathers. So far, his controversial comments have drawn the ire of Mexican President Enrique Peña Nieto with his plans to build a border wall, media organisations The New York Times and The Washington Post, actress Meryl Streep whom he labelled “one of the most over-rated actresses in Hollywood” and millions more personally affected by his policies.

So, when Trump took aim at Malaysia by labelling the country a “trade cheat” for having a large trade deficit — or from Malaysia’s perspective a trade surplus — with the US, Minister of International Trade and Industry Datuk Seri Mustapa Mohamed was quick to come to the country’s defence.

“Our trade surplus with the US is only about US$6 billion, but the US provided a far higher figure. We strongly deny the allegation [by Trump]. We are confident that our trade [policies] are fair,” Mustapa was quoted as saying last week.

Other countries that Trump labelled as “trade cheats” include China — reported to be the top source of the US’ trade deficit — South Korea, Taiwan, India, Thailand, Indonesia, Japan, Vietnam, Germany, Mexico, Ireland, Italy, Canada, Switzerland and France.

Though the US president’s usage of the word “cheat” was not pleasant to the ear, one question comes to mind: wouldn’t that also mean that Malaysia’s exports are thriving, so much so that it caught the attention of the world’s most powerful country?

Exports in February rose an almost seven-year high of 26.5% year on year to reach RM71.8 billion, beating the market estimate of 15% growth.

This came as a surprise to many economists, some of whom revised their gross domestic product forecasts for this year due to the strong export numbers, while others reaffirmed their GDP targets for the year.

MIDF Research, in an April 6 note, upgraded its 2017 GDP forecast to 4.9% from 4.3%, stating that the surging trade is a boon especially to export-oriented industries such as electrical and electronics goods, chemicals, petroleum products and rubber.

AllianceDBS Research says the sharper-than-expected expansion in exports may indicate strong GDP growth of 4.3% to 4.5% in 1Q17, thus supporting the firm’s full-year growth forecast of 4.4%.

AffinHwang Investment Bank Bhd chief economist Alan Tan says the export numbers “tie up nicely” with the improvement in global growth.

“With Malaysia being an open economy, there is positive sentiment for trade from the improvement in global growth; the improvement in crude oil prices has also helped to lend support to this.

“Barring any unforeseen circumstances, such as the implementation of Trump’s protectionist trade policies, the improvement in exports could provide a potential upside to GDP numbers, nearing the higher end of the 4.3% to 4.8% forecast by Bank Negara Malaysia,” he tells The Edge.

It is not just the country’s export numbers that are looking positive. The Leading Index (LI) for Malaysia, which monitors economic performance in advance — such as real money supply, the Bursa Malaysia Industrial Index and the number of housing units approved — and the Coincident Index (CI), which measures the current economic activity, both showed positive annual changes in January this year, with the LI registering an annual change of 0.2% while the CI increased 1.6%.

The Index of Industrial Production (IPI) expanded 3.5% in January and, more recently, the Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) — a composite single-figure indicator of manufacturing performance — posted 49.5 last month, a fractional improvement from 49.4 in February. It was the country’s best reading for the PMI since May 2015.

The IPI for February will be released on Monday (April 10) with economists expecting an expansion of 5.7%.

However, inflation came in higher at 4.5% in February, mainly due to the increase in fuel prices, with the average price of one litre of RON95 petrol at RM2.30 in the month, compared with RM1.75 in February 2016. Bank Negara has projected headline inflation to be higher this year, reflecting primarily the pass-through impact of the increase in global oil prices on domestic retail fuel prices.

“Inflation is definitely an area to look out for in the coming months, since it poses some risk to consumption, to the extent that we do not think the central bank will be in any hurry to react to the uptick in inflation by hiking the policy rate.

“However, we think the impact will remain relatively limited for now, especially if fuel prices no longer head relentlessly upward,” OCBC Bank Economist Wellian Wiranto tells The Edge.

UOB Malaysia senior vice-president of global economics and market research Julia Goh says the positive trinity of trade, PMI and leading indicators will not have an immediate impact on the man on street.

“While there are green shoots emerging, I think it won’t be immediately felt by the general public given that new hiring remains fairly subdued. Businesses may indicate an uptick in optimism but there is still a general sense of caution. Perhaps after new projects kick off and external risks recede, we may see a follow-through to the rest of the domestic economy,” she tells The Edge.

Deutsche Bank AG Singapore economist and vice-president of global markets Diana Del Rosario says consumer spending in Malaysia will strengthen despite higher inflation.

“We think that with fiscal transfers expanding further this year [with the 1Malaysia People’s Aid (BR1M) budget up 15% in 2017] and new incentives introduced, alongside a likely improvement in sentiment due to higher oil prices and better exports, consumer spending would also strengthen despite higher inflation,” she tells The Edge.

Del Rosario adds that private investments in Malaysia have also exhibited signs of a turnaround.

“Yes, the weak ringgit and subdued crude oil prices still stand to weigh on private sector investments; approved investments in the past two years, for instance, are significantly lower than in the preceding two years.

“However, committed investments in 2016 were also up slightly [compared with] 2015, as pledges from China, the Netherlands, Germany, the UK, South Korea, and Singapore (in order of the value of investment pledges) in sectors such as mining, transport equipment, real estate and global operations and regional establishments increased,” she says.

Another element is the China factor. China’s President Xi Jinping paid a two day-visit, which began last Thursday, to meet Trump, with trade and North Korea being two of the main points of discussion.

Note that Malaysia’s exports to China in February grew a whopping 47.6% to RM9.6 billion, while imports from China were up 15.3% to RM10.2 billion. It’s not just about China being a major trading partner of Malaysia — it is also the source of large-scale investments into the country, from projects like Forest City in Johor by China developer Country Garden to the Malaysia-China Kuantan Industrial Park in Pahang.

“China has made large strategic investments in Malaysia, several of which fall under the One Belt, One Road initiative. The tie-ups with Chinese parties enable Malaysians to trade on multiple channels and tap into larger markets,” says Goh.

Therefore, the meeting between Xi and Trump, leaders of the world’s two largest economies, holds much significance, not just for Malaysia but for the rest of the world, with hopes for a positive outcome for global growth.

However, if a trade war ensues, that could put a dampener on Malaysia’s trade outlook. But for now, it is a bright spot in the economy that looks set to drive growth this year.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.