MIDF: Malaysia's economy to contract 0.11% on every 1% slowdown in China

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KUALA LUMPUR (March 8): In the event of a growth slowdown in China, the world's second largest economy, the global economy would be affected and Asian economies, including Malaysia, will be the most impacted, according to MIDF Research.

Every 1% slowdown in China's economy will result in a global growth decline of 0.15%, while Malaysia's will contract by 0.11%, according to MIDF Research's estimates.

"Based on our estimate, global economy is predicted to contract by 0.15% if China slows down by 1%. In addition, Asian economies namely Taiwan, Hong Kong, Malaysia, South Korea and Singapore are expected to be impacted the most, in the range between 0.15%-0.08%. 

"These economies are affected due to high dependence on China, especially on external trade. For instance, Taiwan, South Korea, Malaysia and Vietnam were listed as China’s top ten imports partners in 2018," MIDF Research said in a note to clients today.

In Malaysia, among major industries that could be affected are production of electronic and optical products, basic metals, and electrical machinery, it added.

It is estimating the possible impact of China's slowdown on Malaysia's trade performance after China cut its gross domestic product growth target to 6-6.5% for this year (from 6.5% set last year) amid on-going trade talks with the US, after China's growth last year came in at its lowest recorded level since 1990, at 6.6%.

"The slowdown is mainly due to protectionist trade policy of the US and global uncertainties. China’s Premier Li Keqiang has announced stimulus package during the opening of annual meeting of its parliament. The government sets higher budget deficit at 2.8% of GDP in 2019 (2.6% in 2018). Cut in taxes and fees for companies and increase in infrastructure spending are among key fiscal boosters," MIDF Research noted. 

While the protectionist trade policy by Trump-led administration has resulted in China’s business confidence — as seen in the manufacturing Purchasing Managers Index (PMI) and CEIC Leading Indicator — pointing downward since early 2018, MIDF Research noted that optimism among Chinese is gaining momentum, as the consumer confidence index came in at an average 121.1 points in 2018, its highest in 24 years. 

"Apart from China’s consumption-led strategy, jobless rate hits bottom at 3.8% in 4Q18 and low inflationary pressure, support consumer spending in China last year," it added.

Looking ahead, MIDF Research is of the opinion that China would remain on expansionary path this year, whether it has a trade deal with US in place or not. 

"Recent stimulus packages and steady domestic demand would support economic growth and may reduce the effects of [the] trade war with the US," it said.