KUALA LUMPUR (May 13): Morgan Stanley has cut Malaysia’s 2019 gross domestic product (GDP) growth forecast to 4.5% from 4.6%, as it takes into account the downside risks presented with renewed escalation in the US-China trade tension.
Malaysia is one of six Asian countries to have had its economic forecasts trimmed. The others are Korea, India, Singapore, Taiwan and Thailand.
On a quarterly basis, it projects for Malaysia's GDP to grow at 4.3% for the first quarter of 2019 (1Q2019).
For 2020, it has kept Malaysia’s GDP growth forecast at 4.7%.
In an Asia Economics Mid-Year Outlook 2019 report published yesterday, Morgan Stanley noted that the recent reemergence of trade tension and remaining sticking points in trade discussions mean growth risks are skewed to the downside.
“Near-term uncertainty from trade tension dampens 2Q 2019 sentiment and puts a lid on any nascent sign of pickup,” it said.
Morgan Stanley has also lowered its 2019 GDP growth forecast for Asia ex Japan (AxJ) from 6.1% to 6%, taking into account the lower-than-expected incoming trajectory from the impact that the slowdown in China’s domestic demand has had on AxJ exports so far, coupled with other local factors affecting the regional market.
Nevertheless, the investment bank said it still expects a gradual recovery for the second half of 2019.
It said as trade conflict outcomes are difficult to predict with a high level of confidence, duration of trade tension is key.
“Higher tariffs would lead to a direct impact via export slowdown. But a bigger part of the impact is likely to be indirect, via softer private sector confidence and delayed capital expenditure decisions. Indeed, this indirect impact could get non-linear, if trade tension is prolonged.
“The damage to corporate confidence could get entrenched, spending might not pick up, and a negative feedback loop of weaker global growth and tighter financial conditions could unfold. This appears to be what we underestimated in 2018,” it said.
Morgan Stanley said it assumes the tariffs will remain in place for a relatively short period of time as continued talks and market weakness prompt both sides to make progress towards a deal.
“A timely resolution (3-4 weeks) to the trade tension would limit any private sector fallout, in our view,” it added.
Meanwhile, it said China's countercyclical easing is still in place to drive the country’s recovery, which is expected to benefit the rest of AxJ as well.
It said to keep an eye on incremental commodity demand in energy-related segments (such as coal) and construction-related materials (such as steel) which will benefit countries such as Malaysia and Indonesia.
“Indonesia and Malaysia are the two net commodity exporters in AxJ and would benefit to varying degrees from improvement in commodity terms of trade,” it said.