Higher GDP forecast for Malaysia on better trade prospects

Some economists are turning more positive on the economic outlook for Malaysia this year, thanks to improving global trade prospects.

Economists at the Socio-Economic Research Centre (SERC) and MIDF Research, for instance, are looking at potentially revising upwards their 2017 gross domestic product (GDP) forecasts soon, while Standard Chartered Bank (Stanchart) did so yesterday.RHB Research Institute, on the other hand, had already raised its 2017 GDP growth forecast for Malaysia last week.SERC seems to be the most bullish to date, with its executive director Lee Heng Guie saying Malaysia’s GDP could grow by up to 5% this year on strong exports growth.

“The key to this is our export figures... Growth in exports could provide some upside push to the GDP number,” Lee, a prominent economist, said.“I will relook at my numbers of 4.3% soon, depending on the first-quarter (export) numbers. If exports continue to grow stronger and stronger, then I will raise my forecasts,” he told a press briefing here yesterday.The official 2017 GDP growth forecast for Malaysia, as announced by Bank Negara last month, stands at a range of between 4.3% and 4.8%.
Last year, the economy grew 4.2%.In the same tone as SERC, MIDF said yesterday it would also likely revise upwards its 2017 GDP growth forecast amid expectations of stronger trade activity, noting that the recent surge in global trade activity could boost domestic growth.“Globally and regionally, trade activity has been on the uptrend – reflecting a surge in demand led by China and firmer commodity prices,” MIDF wrote in its report yesterday.

“Strong trade activity is often a strong tailwind to domestic growth. As an open economy in which trade activities account for nearly 1.3 times its GDP, improvement in external demand is often a huge boon to the domestic economy,” it added.At present, MIDF’s GDP growth forecast for Malaysia for 2017 stands at only 4.3%.
“Our analytics show GDP growth could have an upward revision between 0.4 and 0.8 percentage points, depending on the final trade data for February,” MIDF said.Amid a better outlook, RHB Research Institute already raised its 2017 GDP growth forecast for Malaysia last week to 4.5% from an earlier estimate of 4% on stronger external demand.

The research house pointed out that external demand was being driven by an improving global economic outlook, hence lifting the growth prospects of the five main Asean economies, which included Malaysia.According to RHB Research chief economist Peck Boon Soon, Malaysia, which has a total trade size of almost 130% of GDP, would likely be the second country after Singapore to benefit from a recovery in exports.

“In fact, a turnaround in export growth toward the end of last year lifted the country’s GDP growth to 4.5% in the fourth quarter of 2016, the strongest in four quarters,” Peck explained in his report last week.“Apart from improving exports, Malaysia would likely benefit from better commodity and energy prices. The latter would provide some leeway for the Government to increase its expenditure in 2017, after restraining it last year and posing a drag to the overall economic growth in 2016,” he added.

According to Peck, stronger public spending, coupled with resilient private spending, is expected to lift domestic demand higher to a growth of 4.7% in 2017 after slowing to a 4.4% growth last year.While Stanchart has raised its 2017 growth forecast for Malaysia, its projection remains low by any comparison.
The global banking group yesterday announced it would now expect Malaysia’s GDP to grow 4.1% this year, compared with its earlier estimate of 3.8%, driven by the recent export recovery.Separately, AllianceDBS chief economist Manokaran Mottain said he would maintain a “conservative” outlook on Malaysia’s economy despite the improving global trade outlook.

When contacted, Manokaran said he continued to expect Malaysia’s GDP to grow 4.4% this year.Meanwhile, Lee cautioned on potential headwinds to growth, including the high cost of living, inflation and business sentiment.“The main concern for the economy today is inflation: which is the cost push inflation. If this spills over to demand pull, it may demand consumer spending along with the high cost of living. For exports, it can drive the economy, but don’t forget about potential risks from disruptive trade flows from Trump’s policies,” he said.

“Whenever there are trade disputes, it must be brought up to the World Trade Organisation. I’m concerned that if the US decides to go its own way, this will cause other countries to take matters into their own hands as well, and this may disrupt global trade activities,” Lee added.He noted that inflationary pressures had developed in recent months due to the combined impact of fuel price adjustments and the spillover effect of the ringgit’s depreciation on imported goods and services and other cost-related pressures.

SERC’s projections for headline inflation is at 3%-4% for this year, and this is in line with Bank Negara’s estimates.
Meanwhile, Lee said a reduction in low-cost foreign workers would help improve demand for foreign exchange and help upgrade industries in the country and reduce currency outflows.“The Government should have zero tolerance against illegal foreign workers. We can have some numbers of foreign workers, but we should not support the influx of foreign workers. There will be a lot of social implications, such as an increase in demand for public resources and a financial impact from the conversion of currencies,” he said.

On interest rates, Lee said he expects Bank Negara to hold interest rates steady at 3%, but noted that the central bank may be forced to act if cost-induced inflation spills over to a broadening of consumer inflation caused by higher wages and strong demand.He also highlighted the slipping private investment growth of late and said the Government should take proactive measures to change this.“If this is not reversed, then it could eventually jeopardise potential output growth and productivity. The Government could relook at increased regulations such as the anti-profiteering mechanism that is seeing an increased compliance cost in the small and medium enterprises,” he said.“Most importantly, the ecosystem must remain conducive to businesses. I think most people are today concerned of the high cost of doing business since 2015 right after the goods and services tax was introduced, higher minimum wages and the subsidy rationalisation moves by the Government,” he added.