1st Quarter 2010 Update: Malaysian Economic Outlook
The world economy has recovered since 4Q09, following numerous national policy measures which enhanced private demand and global trade conditions. However, the recovery path is uneven with developing Asia leading global growth, and advanced nations trailing behind. The strong economic expansion from developing Asia was led by China, India and Indonesia with their relatively large domestic demand. Policymakers have begun to normalise policy rates, given rising inflation expectations and the emergence of asset bubbles. The Malaysian economy too has rebounded in 4Q09 by +4.5% yoy, leading to a smaller contraction of 1.7% yoy in 2009. The recovery was broad-based with all economic sectors registering strong turnaround. This, along with improving consumer and business confidence, allowed MIER to raise the GDP growth rate to +5.2% yoy in 2010. Economic growth is forecasted to reach +5.0% yoy in 2011.
Private consumption improved further by +1.7% yoy in 4Q09, producing a small growth of +0.8% yoy in 2009. This was supported by strengthening consumer confidence and labour market prospects. Consumer confidence as measured by MIER’s Consumer Sentiment Index (CSI) rose by +4.6 pts qoq in 1Q10; indicating better finances and employment opportunities. Household loans remained resilient at +11.1% yoy in February 2010; it grew by +9.1% yoy in 2009. The unemployment rate eased from 4.0% in 1Q09 to 3.5% in 4Q09, while the number of retrenched workers fell from 12,590 in 1Q09 to 2,125 in 4Q09. Another indicator of private consumption, namely, sales of passenger cars rose by +18.5% yoy in 4Q09 and to +7.5% yoy in February 2010. This was also confirmed by MIER’s Automotive Industry Index (AII), which up 4.3 pts in 1Q10 suggesting recovery in the sector. Accordingly, MIER expects private consumption to accelerate by +5.6% yoy in 2010 and further to 6.8% yoy in 2011.
Gross investment improved strongly by +8.2% yoy in 4Q09 due to effects from large fiscal stimulus packages. Over 2009, public investment surged +12.9% yoy, while private investment fell 21.8%. Business sentiment as gauged by MIER’s Business Conditions Index (BCI) rose by +5.2 pts qoq in 1Q10, suggesting that private investment is gradually recovering. This is also supported by the marginal decline of 0.8 pts in the Vistage-MIER’s CEO Confidence Index (CEO). The government’s liberalisation efforts since April 2009 are expected to promote more investment in the services sector over the long term. The recent announcement of the New Economic Model also contains some positive initiatives, but more concrete measures may be required to boost the attractiveness of Malaysia as an investment destination. With improving domestic and external conditions, MIER anticipates gross investment to grow by +5.0% yoy in 2010 and further lifted to +5.5% yoy in 2011.
Measures implemented by the government to pump-prime the economy during 2008 – 2009 have led to a worsening fiscal balance to GDP ratio of -7.0% in 2009. Following recent economic recovery, public consumption growth eased to +1.3% yoy in 4Q09; it expanded by +3.7% yoy in 2009. In 2010, the government intends to consolidate its position via a 13.7% reduction in the operating expenditure, leading to a smaller budget deficit to GDP ratio of 5.6%. This may be challenging, given recent impediments in the proposed fuel restructuring as well as goods and services tax (GST) schemes. In this respect, MIER forecasts a marginal decline of 0.3% yoy in public consumption growth in 2010, before decelerating further by 2.7% in 2011.
Both exports and imports of goods and services rebounded in 4Q09 by +7.3% yoy and +6.9% yoy respectively, arising from improved global dynamics and trade conditions. Moreover, large shipments of E&E and commodities have lifted exports by +27.6% yoy in January – February 2010. Imports were also higher by +29.5% yoy in January – February 2010 due to favourable conditions. The WTO has predicted a +9.5% yoy growth in global trade in 2010 (-12.2%: 2009), and the Transpacific Stabilisation Agreement recently projected cargo growth of 6.0% to 8.0%. Thus, MIER envisages exports and imports of goods and services to rise by +8.2% yoy and +8.8% yoy respectively, in 2010. In 2011, they will improve further by +8.8% yoy and +9.4% yoy respectively.
By sector, MIER predicts that the agriculture sector will expand by +2.6% yoy in 2010 and +2.2% in 2011 on robust consumption of palm oil by China, India and the Euro zone, as well as firmer global commodity prices. Global economic recovery is expected to boost the production and consumption of crude oil further in 2010 – 2011; the mining sector will grow by +5.4% yoy in 2010 before moderating to -0.3% in 2011 on high base effects. Higher global demand for electronic chips will propel manufacturing growth to +6.2% yoy in 2010, and easing to +3.4% in 2011 on base effects.
MIER Residential Property Index (RPI) up +12.3 pts in 1Q10. Property demand is anticipated to continue moving up owing to the current low interest rate regime, attractive financing packages by developers, a stronger economic recovery, and a prominent asset reflation theme. The completion of 9MP projects along with greater emphasis on fiscal consolidation will negatively affect the construction sector; it is projected to decelerate to +2.3% yoy in 2010 and to grow by +3.3% yoy in 2011.
Lastly, the services sector is anticipated to expand by +5.2% yoy in 2010 and +6.6% yoy in 2011 due to the positive influences from recent liberalisation measures. While MIER’s Tourism Market Index (TMI) up +6.4 pts qoq in 1Q10, the Retail Trade Index (RTI) fell 4.1 pts in the same period, capping overall gains in the near term.
In tandem with economic recovery and higher global commodity prices, overall consumer price inflation is expected to grow by +2.2% in 2010. Since core inflation has been rising faster than overall inflation, MIER anticipates the OPR to settle at 2.75% by end 2010. Firmer economic expansion will further lift the OPR to 3.25% in 2011.
The downside risks to MIER’s forecasts may come from slower than expected economic recovery of the G3 economies, burgeoning sovereign debt problems in the Euro zone, overheating issues and asset bubbles in regional economies, the impact of Basel 3 on financial holding company structures, as well as unresolved domestic structural issues.