The impact of the trade war could drag down the country’s growth forecast from the earlier target of 5.2%

By DASHVEENJIT KAUR / Pic By TMR

Malaysia’s economic growth is expected to drop to 4.8% this year as the looming US-China trade war sends global economies into uncharted territories.

Standard Chartered (StanChart) Global Research chief economist (Asean and South Asia) Edward Lee said the impact of the trade war could drag down the country’s growth forecast from the earlier target of 5.2%.

“The trade war would cause a lower demand impact to China which could translate into a reduction of 0.6 percentage points of growth which is significant.

“That could translate into a 0.3 percentage point impact on Malaysia’s GDP growth,” he said at the StanChart’s second half of 2018 media briefing in Kuala Lumpur yesterday.

Lee added that Malaysia is among the top three most vulnerable countries in Asia towards the trade war.

“This comes on top of Malaysia’s woes of mounting debts as our nation has the highest level of debt among emerging markets (EM), after China.

“The debt level of the country is slightly worse compared to the previous years. Hence, the country is more vulnerable towards the global threats,” he said.

Lee, however, could not conclude if it is a full-blown trade war but the adverse impact is said to be visible towards the nation by early 2019.

Other growth drivers, such as investment and government spending, are likely to face continuing headwinds after moderating in the first quarter of the year.

However, it is not all gloom and doom for Malaysia as the reallocation of global production bases out of China (to avoid US tariffs on Chinese goods) to South-East Asia may partially help offset the dampener on growth caused by the trade war.

“It may benefit some businesses that want to relocate from China in order to escape tariffs under the trade war,” Lee said.

Private consumption, according to Lee, would receive support from continued labour-market strength, a three-month “tax holiday”, and rising consumer confidence for the rest of 2018.

“We have revised down our 2018 average Consumer Price Index inflation forecast to 0.8% from 2.9% to reflect the impact of Goods and Services Tax removal and the reintroduction of Sales and Services Tax,” he said.

The bank also believes the delay in the Kuala Lumpur-Singapore high-speed rail project and the suspension of East Coast Rail Link project could cause a recovery in investment growth to be pushed back beyond 2019.

Lee reckoned investors will maintain momentum in their investment activities in the Malaysian market.

“We are among the top performers in the region in terms of foreign investment holdings, and I assume it will maintain this way,” he said.

On the local currency performance, StanChart foreign-exchange strategist (Asean and South Asia) Divya Devesh said the Malaysian ringgit is expected to trade at 4.00 against the US dollar by year-end.

“The greenback, which had a strong run over the past six months, is expected to remain strong against global currencies. But regionally, we anticipate Malaysia to continue to outperform as it is the best performing currency in the EM basket, after the Thai baht,” he said.

Divya added that quantitative tightening across global markets is expected to have a limited negative impact on the ringgit, for Malaysia is relatively insulated.

“Most investors already being underweight on the currency, and it will continue to be this way. Domestically, Malaysia has a lot of supportive factor as well,” he said.

As for global oil prices, head of thematic research Madhur Jha suggested they would stabilise at an expected US$70 (RM289.87) a barrel this year.

“As the rise in oil prices is driven by higher demand, we foresee prices are likely to be more stable,” she added.

Meanwhile, MIDF Research said the world output dragged by 0.71% amid US-China trade war.

“Based on our estimate, world GDP growth will reduce by 0.71% if demand by the US on Chinese goods and services drops by 1%. In the same note, China’s economy will shrink by 0.72%,” said the research house.

MIDF said for every 1% drop in the US demand, Malaysia’s output will reduce by 0.86%.

Other countries like Hong Kong, Singapore and Vietnam would also be impacted as Beijing and Washington continue to trade threats.

“With imposition of tariff hikes since early this year, we view the demand on manufactured goods especially products relating to washers, solar panels, aluminium and steel will drag down Malaysia’s exports to the US. We forecast Malaysia’s exports growth to the US will decelerate to 3%-5% this year compared to 10.5% in 2017,” it said.