by BERNAMA / pic by MUHD AMIN NAHARUL
A full-blown trade war between the United States and China will impact Malaysia’s economy, slowing down the growth of its export sector by one to two per cent, Affin Hwang Capital chief economist Alan Tan Chew Leong said.
He anticipated should the upcoming meeting between the US President Donald Trump and his counterpart, Xi Jinping during G-20 summit in Tokyo fail to deliver any positive results to defuse the trade dispute, the fall out would follow.
“The US might continue imposing a tariff to all Chinese export and Beijing would retaliate. The supply chain will be impacted, not only in those two countries but the global trade as a whole.
“Malaysia as an open economy, is highly reliant on trade and is currently seeing the positive trade substitution and divergent from the US to Malaysia in the short term, but in long run, Malaysia’s export sector would be impacted,” he said today.
He was met by reporters on the sidelines of Malaysian Association of Asset Managers- International Institutional Investors Series here.
However, he expected that domestic demand would continue to hold up and remain supportive of the Malaysian economy and its Gross Domestic Product (GDP) growth.
“Domestic demands particularly, from private investment, public investment and private consumption would provide a cushion in the slow down of the export,” said the economist.
An escalation in the trade tension according to him, could also possibly lead to the fall in the global GDP, bringing it close to a worldwide recession, which is in the region of three per cent.
“The guidance from the International Monetary Fund (IMF), if the global trade tension escalates, the drag on global GDP would be 0.5 percentage point. Assuming today, that we are looking at 3.6 per cent global GDP growth in 2020, an 0.5 percentage point would drag global GDP to 3.1 per cent is very near to global recession level,” he explained.
For Malaysia, the bank he said, has a base case assumption of 4.5 per cent in 2019 with similar growth in 2020, barring any escalation in global trade tension.
“But, if it is escalating (the trade tension), we might see (Malaysia) growth at four per cent next year and possibly dropping below four per cent as China is our main trading partner.
“However, we are of the view that there would be some form of compromise between the two leaders (Donald Trump and Xi Jinping during their meeting in G20 summit in Tokyo), where a certain memorandum of understandings would be announced,” he said.
Alan stated that while the higher tariff might not be withdrawn immediately as a result of the highly-anticipated meeting in Japan, “some form agreements by the two giant economies would prevent an escalation of a full-blown trade war.”
If Malaysia’s export is impacted due to trade tension, softer commodities prices while import of capital goods and consumption goods hold up, it would put downward pressure on Malaysia current account surplus position, said Alan.
The current account according to him, would not drop to the deficit but it would be narrowed, hence putting pressure on the ringgit and the country’s reserve position, but the economist also emphasised with Malaysia’s well-diversified export, it is unlikely the case.
“Even if the export of electronics slows, this would be offset by other petroleum-related products. Similarly. we may see steady oil prices that will help the country’s export,” said Alan.
On another note, it is important for the government to continue fiscal consolidation to demonstrate its commitment to fiscal discipline.
“Before a downturn or crisis, it is better for the government to safeguard the current fiscal deficit position. So when the time comes, they could introduce new fiscal stimulus measures to support the domestic economy, “ he said.
After a year in office, the current government he believed, would be focussing on providing the best support to the economy, especially during the period of times of uncertainty.