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Domestic demand to support Malaysian economic growth [04-12-2017]  
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IN the wake of weaker business conditions and consumer sentiment, coupled with a decline in manufacturing data, there are concerns that Malaysia’s recent strong economic growth may not be sustained.

“Domestic demand has been lifting growth. Despite falling business conditions and consumer sentiment in the third quarter, Malaysians continue to spend and invest.

“This lead to growth in private consumption and investment by 7.2% and 7.9% respectively, suggesting that disruption in sentiment may not necessarily translate into lower spending,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

Malaysia’s business conditions index fell to 103.1 points in the third quarter, from 114.1 points in the previous quarter. Its consumer sentiment index slid by 3.6 percentage points, quarter-on-quarter, to 77.1 points.

Its purchasing manufacturers index (PMI – an indicator of the health of the sector) dropped to 48.6 in October from 49.9 in the previous month, representing the second straight month of decline.

“There could be over-expectation of strong growth. The year-on-year growth of 6.2% for the third quarter was a good number but consensus could be just for growth of around 5% in the near term, which is also good for the region.

“With the global economy continuing to improve, and strength in commodity prices and thus, fiscal position, Malaysia’s growth may sustain at around 5%.

“This is so long as there are no major negative events arising from the movement of the ringgit and inflationary pressure,” said Danny Wong, CEO, Areca Capital.

“Malaysian economic growth has been an upside surprise for 2017, boosted by strong domestic demand and higher exports on the back of strong external demand. The recovery of commodity prices from the slump in 2016 had also contributed to strong exports.

“Growth is likely to moderate in the near term due to the waning of the low base effect. It will be supported by public and private investment while government handouts and bonuses to civil servants will continue to support growth in private consumption,” said Thomas Yong, Fortress Capital.

Other catalysts include special financial payments to retirees and personal tax cuts that help to ease the pressure on the cost of living. “Private investment may face headwinds from uncertainties ahead of the elections which must be held by June 2018,” said Lee.

“In spite of strong growth data, PMI has been weak. Growth has not been even across all sectors, with some major industries seeing weak growth.

“Growth in household income has typically lagged that in gross domestic product, as most people are employed in the services sector where productivity growth is slower than in manufacturing.

“That which is far weaker is growth in manufacturing employment. In the construction sector which has, in recent years, seen the fastest growth, labour is very dependent on foreign workers,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

Property market crash unlikely

Will weakness in the property sector translate into broader economic weakness?

“A crash in the property market, which is plagued by affordability issues, is not likely. For a crash to happen, there needs to be much higher rates and a business cycle downturn,” said Pong.

“This involves credit risk and asset quality in the financial system, which is well under the control of Bank Negara,” said Wong.

“Despite a multi-year consolidation amid moderating prices, the property sector must go through a reset, as it rebalances from over-supplying the consumer and investor market.

“Intervention policy is urgently needed to aid in the orderly unwinding of the imbalances. Economic and financial risks associated with the property glut are real, and should be taken seriously.

“A sharp correction in the property sector due to severe economic and financial shocks will have negative spillovers to the wider economy and financial institutions,” said Lee.

What are the prospects for ringgit strength in view of slowing Chinese growth and upcoming US tax reform?

“With an improving current account surplus, fiscal health and a more hawkish tone by Bank Negara (to raise rates), the ringgit’s strength against other Asean currencies is likely to be maintained in the near term,” said Yong.

“US tax reform may have an impact on global fixed investments and potential reactionary measures from other economies,” said Wong.

“The ringgit has strengthened around 5% on a trade weighted basis. (Issues on Chinese growth and US tax reform) may cause it to trade sideways for a few weeks before strengthening to around RM4 to the US dollar, closer to the elections,” said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank. “The ringgit can run into headwinds, with uncertainty over the outcome of the elections shand expectations of more US rate hikes,” said Lee.

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