Economy in sweet spot as fundamentals improve

by ALIFAH ZAINUDDIN

The stars are lining up favourably for the Malaysian economy with the pace of growth set to get a boost from strong exports, while higher wage levels are expected to support consumption amid easing inflationary pressure.

While investor confidence in the country’s biggest stock listing in five years — that of Lotte Chemical Titan Holding Bhd — was muted, the real economy is strong, according to Bank Negara Malaysia (BNM) and economists.

With exports growing over 30% year-onyear (YoY) in May and inflation falling to 3.9% from a high of 5% in March, the Monetary Policy Committee (MPC) of the central bank keeps its monetary policy stance unchanged, holding its Overnight Policy Rate (OPR) at 3% with a projection for it to remain steady for the remainder of the year as the inflation level is expected to ease in the months ahead.

“At the current level of the OPR, the stance of monetary policy is accommodative and supportive of economic activity. The MPC will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation,” BNM noted in a statement yesterday.

It added that the more favourable global growth prospects will lead to sustained export performance and generate positive spillovers to the domestic economy.

Private consumption will be underpinned by higher wages and employment, while improved investment outlook is being driven by new and ongoing infrastructure projects, and stronger capacity expansion in the manufacturing and services sectors.

Following a strong first performance of a 5.6% real gross domestic product (GDP) growth in the first-quarter (1Q), the World Bank in June upgraded its annual GDP estimate to 4.9% from a 4.4% forecast in April.

Sunway University Business School economics Professor Dr Yeah Kim Leng said GDP expansion could exceed 5% on stronger global demand.

“Given the strong 1Q performance, accelerated export growth and the strengthening in domestic demand in both consumption and investments, GDP growth can exceed the 5% level,” Yeah told The Malaysian Reserve (TMR).

Consumption could rise as salaries and wages paid in the manufacturing sector for May increased by 13.3% YoY — higher than the 10.5% growth in April — to RM3.5 billion, according to official statistics.

Yeah said growth in wages, particularly in the manufacturing and services sector, is consistent with the rise in earnings posted by most companies.

“It is quite broad-based, but this is particularly the case for export-oriented companies. They are able to pay higher wages due to their stronger performance,” he said.

Australia and New Zealand Banking Group Ltd (ANZ) head of Asia research Khoon Goh expects OPR to be left unchanged this year after inflation moderated to 3.9% in May, following an eight-year peak of 5.1% in March.

“Inflation should moderate later this year and growth is not strong enough to start putting upward pressure on inflation. Hence, there is no reason for BNM to alter its policy settings,” he told TMR.

Additionally, the existence of excess capacity in industries such as oil and gas, as well as property would also limit the possibility of demand-pull inflation to emerge, said Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

“We anticipate there could be a sense of optimism from BNM with regard to the external sector and how it may impact the overall economy. In some sense, the OPR may have reached its bottom in tandem with the state of the global economy,” Mohd Afzanizam said.

The global economy has been on the recovery track, with improvements in world trade and manufacturing outputs for much of the first-half of the year.

Recent data released by the Statistics Department showed a robust growth of 4.6% in Malaysia’s Industrial Production Index (IPI) in May, outpacing the 4.2% growth in April and exceeding poll forecast for the second straight month.

The solid factory output was backed by a strong 7.3% growth in the manufacturing index and a 2.5% improvement in the electricity index. The mining index, however, declined by 2.3% for the month.

Growth in the manufacturing sector expanded in May, driven by increased production across major sub-sectors such as electrical and electronic products (11.6%), food, beverages and tobacco (12.9%), as well as petroleum, chemical, rubber and plastic products (3.1%).

Malaysia’s exports rose from increased demand from China and a competitive boost from the ringgit weakness, said Goh, adding that exports growth would stay positive for the rest of the year.

“Judging from the survey data, it appears China’s economy is stabilising with foreign-exchange reserve continuing to rise since February this year. House prices have also somewhat corrected, while lending activities based on new loans in June also rose.

“Therefore, demand from China should be supportive of Asia’s external sector, including Malaysia,” Mohd Afzanizam said.