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This article first appeared in The Edge Financial Daily on November 12, 2018

KUALA LUMPUR: The country’s gross domestic product (GDP) is expected to have picked up in the third quarter (3Q18), compared with the 4.5% recorded for 2Q18, underpinned by strong growth in private consumption following the three-month tax holiday period, according to economists The Edge Financial Daily spoke to. When Pakatan Harapan came to power in government after the 14th general election, it zero-rated the goods and services tax (GST) for three months, which gave rise to the tax holiday, before the GST was abolished and replaced by the sales and services tax (SST) on Sept 1.

Bank Negara Malaysia is set to release the 3Q18 GDP results by Nov 17. Malaysia’s GDP growth had been moderating for the past three consecutive quarters, since it posted a 6.2% year-on-year (y-o-y) growth for 3Q17 — the highest recorded since 2Q14. GDP growth fell to 5.9% for 4Q17, then to 5.4% for 1Q18, before falling further to 4.5% for 2Q18.

Affin Hwang Investment Bank Bhd chief economist Alan Tan expected GDP for 3Q18 to strengthen to 4.8% to 5%, driven by the tax holiday-driven private consumption spike. “Based on the latest August 2018 numbers, yearly growth in retail sales rose to the strongest level since 2008, while motor vehicles shot up to double-digit growth for the first time since 2015,” Tan noted. But 3Q18 growth will still be “substantially lower” compared with the high base set in 3Q17 amid external trade uncertainties. The trade balance in 3Q18 slipped 4% y-o-y, with supply disruptions seen in the agricultural and mining sectors, Tan noted.

RHB Research Institute economist Peck Boon Soon, who has projected 3Q18 growth to come in at 4.8%, said: “Without the tax holiday, growth would not be [as] rosy.” Peck also observed that imports saw a double-digit growth during the tax holiday, before contracting in September, which reflected that businesses had stocked up in anticipation of stronger consumer spending during the tax holiday. While consumers brought forward their spending, volumes fell sharply in September as the SST was introduced. The decline, said Peck, was expected to continue in the final quarter of the year, where he expected growth to moderate to 4.5%.

SERC executive director Lee Heng Guie was less optimistic in his 3Q18 projections. He thought 3Q18’s growth would be flat at 4.5%, mainly on a continued drag from contraction in the mining and agriculture sectors, as well as a slower pace of exports, despite private consumption likely having expanded at a healthy pace.

 

Downside risks to Putrajaya’s 2018 growth target

In August, the central bank lowered its GDP growth forecast for the full year to 5%, from its earlier projection of 5.5% to 6%. In Budget 2019, the government cut its projected GDP growth rate down to 4.8% in view of global headwinds and as the International Monetary Fund had lowered its global economic growth rate forecast to 3.7% for this year from 3.9% previously. Mindful of an “increasingly hostile global environment”, Putrajaya expects Malaysia’s GDP growth to only be marginally better next year at 4.9%. While economists believe the government’s target growth for 2018 is achievable and will be supported by private consumption, downside risks they have highlighted included rising trade tensions and a continued slowdown in the mining segment.

Tan said he expects GDP growth to expand by 5% for the whole year but will likely review his forecast after the release of official data on 3Q18 GDP growth. “Households, despite having front-loaded their expenditure in 2Q18 and 3Q18, will unlikely cut spending significantly, partly reflecting Malaysia’s stable labour market conditions and steady wage growth,” Tan said. As for 2019, Tan said “global risks remain substantial” and will likely weigh on growth prospects. “We expect Malaysia’s exports and manufacturing production to likely experience some slowdown in growth, given likely slower exports to China and EU (European Union) countries, as well as concerns about oncoming global trade tensions.”

SERC’s Lee was of the view that Putrajaya’s revised estimate of a 4.8% growth for 2018 is still at risk of seeing some tweaking — by 0.1 to 0.2 percentage points — should there be a larger and more sustained contraction in mining output, and as private consumption slows as consumer spending normalises after the tax holiday. Lee, who has projected a GDP growth of 4.8% for 2018 and 4.7% for 2019, also said his forecasts are subject to downside risks that are largely external, namely the ongoing trade war intensity, rising US interest rates and financial market volatility.

On the domestic front, Lee said risks include slower consumer spending due to the rationalisation of fuel subsidies and cost of living aid, as well as continued rationalisation of public spending. Inflation-wise, Tan said it should be low this year, mostly due to abolition of the GST. “We expect the full-year 2018 inflation to be in the range of 1.2% to 1.5%, before trending higher to 2.5% in 2019, taking into account the floating of domestic fuel prices as the government starts to implement the targeted subsidy in April 2019.”

Lee estimated that inflation will be an average of 1.3% this year, before picking up to 2% to 2.5% in 2019.

As for the ringgit, amid the prospect of a continued US interest rate increase, Lee expected the local currency to trade at 4.15-4.20 against the US dollar by end-2018.

Tan and Peck, however, expected the ringgit to strengthen to 4.10 on the view that the market had already factored in a potential US rate hike.

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