HELPED by a slight quarter-on-quarter pick-up in private consumption, Malaysia’s economy surprisingly grew 4.3% in the third quarter, bringing year-to-date gross domestic product (GDP) growth to 4.2%. But domestic demand, Malaysia’s key economic growth driver, is facing strong headwinds due to a sharp depreciation of the ringgit on the back of post-Trump uncertainties and possibly higher food prices, thanks to costlier cooking oil.
Not only were subsidies for palm and palm-blended cooking oil — except 1kg poly packs — lifted from Nov 1 but petrol and diesel prices were also hiked to their highest since last December early this month. In March, roti canai prices, for example, rose after subsidies for 25kg bags of flour were cut.
“The rising cost of living, softening employment market and high household debt servicing are factors that will cap the upward trend in consumer spending going forward,” says Lim Chee Sing, executive chairman and chief economist at RHB Research Institute. He expects headline inflation to “trend higher and average 2.5%” next year from around 2% estimated for this year.
While the Consumer Price Index (CPI) has stayed largely within the expected 2% to 2.5% this year, the official prediction for next year is 2% to 3%. The numbers have already started rising on higher cost of imported goods, and food and non-alcoholic beverage prices.
Between January and September, the prices of food and non-alcoholic beverages rose 4% compared with 3.6% in 2015 and 3.3% in 2014. The increase was offset by lower transport costs as pump prices were relatively lower prior to the recent hike. But lower-income households, especially those in the bottom 20%, do not benefit much from lower pump prices. They are more affected by the hike in the prices of food, on which they spend a large share of their income.
Urban households (and individuals) in the lower-income group with a fixed income stream and no savings are bearing the brunt of the rising cost of living. They are more likely to be found in Kuala Lumpur, Selangor, Putrajaya, Penang and Johor, which account for 43% of Malaysia’s total population, where households experience higher inflation rates than the national average, according to a study published in Bank Negara Malaysia’s 2015 annual report.
In fact, when the food and non-alcoholic beverage sub-index rose 3% in September this year, six states saw even higher increases in their index, led by Johor (+3.8%), Kuala Lumpur (+3.7%), Penang (+3.6%), Melaka (+3.3%), Selangor and Putrajaya (+3.1%) and Negeri Sembilan (+3.1%), according to Statistics Department data. States that saw increases below the national average include Sarawak (+2.3%), Perak (+2.1%) and Sabah and Labuan (+1.2%).
The food and non-alcoholic beverage sub-index’s 4% rise from January to September 2016 made it “the main upward contributor to the CPI’s rise” for the nine-month period — with food at home up 4.2%, food away from home up 3.9%, while coffee, tea, cocoa and other non-alcoholic beverages rose 1.5%.
Even if one were to cook at home to save money, “significant” price increases were seen for vegetables (7.9%), fish and seafood (6.8%), fruits (5.4%), meat (3.8%) and other unclassified food products (6%), official statistics show.
Core inflation, which excludes most volatile items of fresh food, as well as administered prices of goods and services, recorded changes ranging from 2% to 3.6% in January to September 2016. “This indicates the underlying or the long-run trend in the price level,” the Statistics Department says in its Oct 21 statement.
“We foresee more pressure on food inflation in the coming months, especially going into the festive periods. Price control mechanisms, government measures to ensure sufficient supplies as well as budget allocations to maintain selected subsidies going into next year are encouraged to help manage the rising cost of living,” says UOB Malaysia economist Julia Goh, who expects headline inflation to touch 2.4% this year.
It is also worth noting that the price control and anti-profiteering mechanism to keep prices in check post-GST implementation is set to expire on Dec 31 unless it is extended again.
“CPI growth is expected to trend upwards following the increases in petrol and cooking oil prices. The upturn is also due to a lower base at the end of last year,” Goh says.
Indeed, it was only last December that highway toll and rail charges were raised while electricity tariff rebates were cut this January. Higher alcohol taxes in March also shored up the CPI.
The ringgit stayed between 4.00 and 4.20 against the US dollar for the past eight months before skidding past 4.40 last Friday, a level seen in January as foreigners sold bonds and pulled funds from emerging markets on renewed chances of a US interest rate hike.
It remains to be seen how the market will react to Bank Negara’s “measures to ensure the markets do not price the ringgit excessively out of sync”, which banking sources see as “unofficial capital controls”.
For now, UOB’s Goh is pegging 2017 inflation at 2.5%, albeit with an upside bias “depending on how oil prices and the ringgit perform”.
According to her, the resilient 3Q2016 private consumption annual growth of 6.4%, compared with 6.3% in 2Q2016 and 5.3% in 1Q2016, benefited from the Hari Raya festivities in September, higher minimum wage and adjusted civil servant salaries in July, plus BR1M cash payouts.
Whether year-end consumption will remain strong is unclear but lower private consumption had been expected well before the so-called “Trump Tantrum” because of softer labour market conditions. The unemployment rate was 3.5% in August, just above the YTD average of 3.4% and 3.2% in 2015.
“Not only has unemployment inched up but there are also fewer job vacancies ... more consumers would probably start cutting back expenditure, if they haven’t already done so. It is Cuti-Cuti Malaysia [holiday in Malaysia] for me,” one economist says.
To be sure, meeting headline GDP numbers for 2016 is not a real concern just yet, considering the pipeline of development projects to prop up private investment. Having beat 1Q’s 4.2% and 2Q’s 4%, the local economy only needs to expand 3.5% in the fourth quarter for full-year figures to meet the official guidance of 4% to 4.5% for 2016.
It is next year’s 4% to 5% GDP and government tax revenue collection projection that some experts are questioning. Already, Malaysia’s economic growth has slowed from 5% in 2015, 6% in 2014 and 4.7% in 2013.
Bank Negara predictably maintained its 2016 GDP forecast last Friday and spoke well of domestic demand continuing as the key growth driver. “Private consumption is expected to remain supported by wage and employment growth, with additional impetus coming from announced Government measures to increase disposable income. Investment activity will continue to be anchored by the ongoing implementation of infrastructure projects and capital spending in the manufacturing and services sectors.”
Yet for a second straight quarter, the central bank ended its statement in the following manner: “Overall, while domestic conditions remain resilient, uncertainties in the external environment may pose downside risks to Malaysia’s growth prospects.”
Experts see slower exports as the possible main drag on GDP growth momentum — more so should US President-elect Donald Trump follow through with protectionist trade barriers on Asian exporters like Malaysia, economists say.
“On the external front, export growth is expected to remain weak following subdued demand from Malaysia’s key trading partners,” the central bank’s statement read.
Among the ordinary consumers, at least users of four highways — the Eastern Dispersal Link (EDL), Kajang-Seremban Highway (LEKAS), Senai-Desaru Expressway (SDE) and Guthrie Corridor Expressway (GCE) — do not need to fear a hike in toll through next year after the government said it would pay the concessionaires a compensation of RM59.77 million. Users of 18 other highways will remember the hike in mid-October last year.
But other costs could rise as the government is expected to continue to cut blanket subsidies in favour of targeted ones. Liquefied natural gas, 1kg packs of general purpose flour and 1kg poly-pack cooking oil were the only remaining government-subsidised controlled items, according to the Ministry of Domestic Trade, Co-operatives and Consumerism’s website at the time of writing.
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