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This article first appeared in The Edge Malaysia Weekly on January 28, 2019 - February 3, 2019

LAST week, the International Monetary Fund (IMF) revised the global growth forecast again, cautioning that the expansion seen in recent years is losing momentum.

From the 3.7% global growth estimates for 2019 and 2020 given last October, the fund  lowered its forecast to 3.5% for 2019 and 3.6% in 2020.

At the World Economic Forum annual meeting in Davos last week, IMF chief Christine Lagarde was quoted by the media as saying that the world economy is growing at a slower pace than expected and risks are rising. She added that while the economy continues to “move ahead”, it is facing significantly higher risks.

Based on a revised forecast, the further downward revision by the fund is not reassuring — markets in Asia fell briefly after the downward revision was made known.

Against the backdrop, we now look at the indicators for better clues. Should we be concerned about the impending slowdown or are we overreacting?

One major concern that is often highlighted by economists is the trade war between the US and China. The weekly news that flows out from both sides can be quite disconcerting for the market. After the January meeting between top officials from both sides of the divide, news about the negotiations seems to have dried up.

There is still uncertainty over whether both parties will be able to sort out their problems.

A forward-looking indicator that is recognised globally, the manufacturing Purchasing Managers’ Index (PMI) has sunk to its lowest since September 2016.

The index, which is produced by JP Morgan and IHS Markit, fell to a low of 51.5 in December 2018, from 52 points in November. The director of global economic coordinatoion at JP Morgan David Hensley says in a press release that the December manufacturing PMI signalled that the global manufacturing sector ended 2018 on a subdued footing.

“Output growth remained stubbornly low, rates of increase in new orders and employment slowed and international trade flows have deteriorated. The outlook also remains relatively lacklustre, as business confidence dropped to its lowest level in the series’ history,” he adds.

The world’s largest manufacturer, China saw a contraction in its manufacturing PMI reading for December — as it fell to 49.7 from 50.2 in November. This is the first time since May 2017 that the reading has fallen below the 50 point threshold, which separates expansion from contraction.

“In general, China’s manufacturing sector faced weakening domestic demand and subdued external demand in December. Companies had a stronger intention to destock and prices of industrial products were declining, which could further drag on production. It is looking increasingly likely that the Chinese economy may come under greater downward pressure,” says Zhengsheng Zhong, director of macroeconomics analysis at CEBM Group, in a press statement.

For Malaysia, the manufacturing PMI has followed a similar trend. It slipped to 46.8 points in December from 48.2 in November, the lowest level since the survey began in July 2012.

According to the press release, demand fell markedly while export orders dropped for the first time since June on the back of economic weakness across Asia. Firms cut back stocks of inputs and finished goods as production fell, implying that the beginning of 2019 could remain negative.

Institute for Democracy and Economic Affairs (IDEAS) economist Adli Amirullah opines that the global trend of declining manufacturing PMI is worrying, especially in a country like Malaysia, which is export-oriented.

“Given that Malaysia’s manufacturing sector contributed about 82.07% of total exports and 87.19% of total imports in 2017, slower global PMI indicates that there will be slower demand, hence lowering the net exports,” he explains.

Nevertheless, he stresses that the manufacturing PMI is just one of the indicators for measuring economic health and does not indicate that the country’s economy is not doing well.

“Malaysia just needs to remain at its competitive advantage to keep trading in the world market at a healthy level,” he adds.

China’s economy grew at 6.6% in 2018, the slowest in 28 years. This year, it is expected to slow further.

Standard Chartered Global Research said in a recent report that it is maintaining its growth forecast for the country at 6.4%. It adds that the economy faces downward pressure from sluggish credit growth, a possible property market correction and the trade tensions with the US.

“We estimate that full implementation of announced US tariffs (25% additional tariffs on US$250 billion of products from China) – which we think is still likely, despite the recently agreed tariff truce – would lower GDP growth by 0.6ppt,” it adds.

The Chinese government has taken some initial measures to contain the downturn. In January, the People’s Bank of China (PBoC) announced a blanket 100bps reduction of the bank’s reserve requirement ratio (RRR) to 13.5%.

Standard Chartered Global Research is expecting the PBoC to cut the RRR by 200bps by end-2019 to prevent a tightening of monetary and credit conditions.

Given that China is an important trade partner to Malaysia, IDEAS Adli believes that participating in a regional trade deal is more than crucial during a time like this in order to cushion the impact of China’s slower growth.

“The policymakers should seek more trade opportunity through trade deals such as Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Agreement for Trens-Pacific Partnership (CPTPP), and even potential EU-ASEAN Free Trade Agreement (FTA). Note that even if these FTAs do not provide direct trade benefits, it is essential to grasp the indirect benefits where we could strengthen our position in the region especially during a time of global uncertainties,” he adds.

So far, among the economic powerhouses, the US is seen as one of the more stable economies this year even though it is forecast to grow at a slower rate at 2.3%, according to the US Federal Reserve, compared with the 3% growth in 2018.

While the domestic economy seems to be stable, Standard Chartered Global Research says that it remains watchful of downside risks, particularly a sharper global growth slowdown than currently forecast and associated commodity price declines, which would impact US producers negatively. The research house is expecting WTI oil to average over US$70 (RM288.99) per barrel in 2019.

Even with the US economy seemingly stable, many experts have said to not expect 2019 to be smooth sailing.

 

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