Moderate but healthy growth expected for Malaysia in 2018

RHB Research attributes its projection on the back of slower exports


Malaysia’s economy is expected to post a slower growth this year due to export normalisation, according to RHB Research Institute Sdn Bhd.

In its regional economic outlook report, the research firm said it expects the gross domestic product (GDP) to grow at a more moderate but healthy pace of 5.2% this year.

RHB Research attributed its projection on the back of slower exports, due partly to a higher base in 2017 and slow-down in public spending — in line with the government’s fiscal consolidation drive.

Growth is, however, likely to remain supported by resilient domestic demand, as the exports would continue to expand and trickle down to consumer spending and private investments.

Meanwhile, domestic demand is expected to hold up in 2018, as the trickle-down effect from sustained external activities would continue to be felt and become more broad-based, it said.

“We envisage domestic demand to continue to grow at a robust pace of 6% in 2018, albeit slower than the +6.5% estimated for 2017, and this is still favourable compared to 2016’s +4.3%,” it noted.

RHB Research said the current account surplus in the balance of payments in 2018 is set to widen to 2.7% of GDP in 2018.

This is from a surplus of 2.5% of GDP estimated for 2017 due to a wider merchandise balance and smaller deficit in the transfers account, it said.

As for the headline inflation rate, the firm noted that it is likely to ease off, but stay elevated in 2018 on the back of relatively stable fuel prices.

“However, it ought to be partly mitigated by the demand-pull effect from resilient domestic demand and a gradual removal of gas subsidies,” the report stated.

RHB Research expects an increase in the Overnight Policy Rate by 25 basis points in 2018 on account of an elevated inflation rate, while Malaysia’s economic growth continues to sustain at a reasonably strong pace.

“This is also in tandem with major central banks’ moves to tighten monetary policy,” it noted.

Private consumption is forecast to remain strong — supported by employment gains and income.

“Private consumption is expected to maintain its strong pace with a growth of 6.3% in 2018, albeit moderating from +6.7% in 2017, in our view.

Improving Consumer Sentiment

“At the same time, consumer sentiment would likely continue to improve amid a lower inflation,” RHB Research said.

Additionally, private investments are expected to grow at a healthy pace of 8.6%, lifted by implementations of mega infrastructure projects and investments in plant and machinery by exporters to meet growth in export demand.

On the public expenditure, the research firm expects government spending to moderate next year, as it plans to reduce the budget deficit to 2.8% of GDP this year, from 3% of GDP in 2017.

Nevertheless, RHB Research does not expect public spending to fall off a cliff, due to the fact that 2018 is an election year.

It also forecast real exports to grow at a sustained pace of 5.6% in 2018, although slower from the 8.8% estimate in 2017.

“This is on account of more moderate demand for electrical and electronics (E&E) shipments, as well as non-E&E and commodity export products,” it said.

On the supply side, RHB Research predicts the manufacturing industry to hold up in 2018, supported by sustained growth in external and domestic demand.

Meanwhile, the mining sector would be driven by a stronger production of natural gas, while the services sector is expected to maintain its resilient growth on sustained trade and domestic demand.

Agriculture output is expected to slow in 2018 amid a higher base due to the strong recovery this year from El Nino, it said.

Likewise, the construction sector is expected to moderate on the back of slower residential construction.

On the external front, although the global growth outlook is likely to be sustained in 2018, the research firm believes international trade is forecast to show a slower growth next year.

“This would be due to the higher base after a strong rebound in 2017,” it noted.

At the same time, demand from China is expected to slow, amid the monetary policy tightening by the authorities there.

As a result, RHB Research stated countries that benefit- ted from a recovery in global trade — such as Malaysia and Singapore — may see slower economic growth.

On the currency front, the ringgit is expected to strengthen by 10.1% to trade at around RM3.95 against the US dollar at the end of 2018, driven by a surplus in current accounts.

At the same time, the report stated that a weakness in the US dollar — given expectations of a stronger euro as the European Central Bank tapers its quantitative easing — suggests that emerging currencies like the ringgit could strengthen against the US dollar as well in 2018.

Asean-5 Outlook

Overall, RHB Research expects the Asean-5 — Indonesia, Malaysia, the Philippines, Singapore and Thailand — to sustain its growth momentum at 4.8% in 2018, the same pace as in 2017.

While Singapore and Malaysia are expected to see slower growth next year due to export normalisation, Indonesia and Thailand are envisaged to see stronger growth on recovering government spending and private investment.

Despite expectations of stronger global economic growth next year, RHB Research said it is unlikely to be emulated by global trade volumes repeating its stellar performance of 2017.

Meanwhile, private spending should continue to benefit from improving labour markets and growing foreign direct investments.

Government spending in selected countries is expected to provide key support to domestic demand, while the region as a whole should continue to be backed by a broad-based infrastructure spending theme in tandem with China’s Belt and Road Initiative over the long term, it said.