By RAHIMI YUNUS

The escalating trade war between the US and China could shave Malaysia’s GDP by 1.5%, if the two economic giants fail to conclude an agreement which might escalate tension.

Affin Hwang Investment Bank Bhd head of research and chief economist Alan Tan Chew Leong said downside risks loom on the assumptions that if the two world’s biggest economies continue to play tough and upend the prospect of a trade deal.

The US-China trade spat is currently under a 90-day ceasefire, but investors remain anxious about the outlook of the trade negotiations ahead of the March 1 deadline.

US President Donald Trump had earlier agreed to freeze higher tariffs on US$200 billion (RM822 billion) worth of Chinese goods from 10% to 25%.

However, should there be no trade settlement by the end of the ceasefire, the dreaded tariffs will be imposed, according to a White House statement.

“The drags on Malaysia’s GDP will be quite significant — at about 1.5% point against a 4.7% GDP — under the assumptions that the trade war continues after the 90-day ceasefire and Trump decides to impose tariffs on the remaining Chinese imports,” Tan said after the launch of Affin Hwang’s Securities Borrowing and Lending facility in Kuala Lumpur yesterday.

Various rating agencies and banks have forecast Malaysia’s GDP to cool off between 4.6% and 4.7% this year as a result of lower private investment and slower exports growth.

Tan said China’s economy, which is already showing signs of a slowdown, may further decline towards the second half of the year (2H19) if the trade war escalates into the worst case scenario.

China and the US are Malaysia’s largest and third-largest trading partners respectively.

According to the Department of Statistics, Malaysia’s total exports to China stood at RM127.4 billion, while exports to the US was at RM82.8 billion for the January-November 2018 period. Singapore was in second with RM127.2 billion.

Tan said local electrical and electronics, and commodities are the top sectors which are facing a greater risk of being badly affected.

However, Tan said the US and China are likely more willing to compromise now to contain business and consumer sentiments that are already deteriorating in China due to a slo-wing economy and a dysfunctional government in the US.

He added that the global economic growth  will be further supported by a dovish hike expected from the US Federal Reserve this year, indicating a weaker dollar which is favourable for currencies in emerging markets.

Tan said the ringgit is expected to appreciate against the greenback at RM3.94 level in 2H19 and possibly ending the year at RM3.90.

He added that the FTSE Bursa Malaysia KLCI is projected to test the 1,810-point level this year, even though the market is expected to remain flat in 1H19.