KUCHING: The research wing of CIMB Investment Bank Bhd (CIMB Research) expects consumer spending to continue growing but at a slower rate of 5.5 per cent to 6.5 per cent over the next two years.
This was based on calculations from the last economic crisis.
“During the crisis in 2008/2009, although consumer sentiment dropped to 70 points (pts), retail sales still registered 0.8 per cent growth.
“This time, although consumer sentiment has fallen below the 100 pts threshold level, it is much stronger than the levels seen in 2008/2009.
“Thus, we are expecting consumer spending to continue to grow but at a slower rate. If the government were to increase electricity tariff every six months, consumers will adapt to it gradually,” it said.
Resilient consumer spending can be attributed to the strong purchasing power that Malaysians have. While household debt-to-gross domestic product (GDP) ratio has been rising, household financial asset-to-household debt ratio has been stable and is 2 times of the household debt.
Other than this, the research house noted that household income increased at a strong annual growth rate of 7.2 per cent between 2009 and 2012 which was more than sufficient to cover the average inflation rate of 1.8 per cent over the same period.
“While the income growth rate will slow down in the near term, as companies adjust to the higher operating costs, we do not expect it to drop substantially.
“We think that an average three per cent growth rate, which could more or less cover the inflation rate, is conservative enough as we do not see softness in the employment market as business sentiment remains strong,” it added.
Meanwhile, the introduction of the goods and services tax (GST) may result in higher retail spending initially as Malaysians are likely to spend before the GST takes effect, but this will be followed by an unwinding immediately after the implementation.
CIMB Research said that the unwinding effect was usually short-lived and expected the consumption to return to normal levels after three months or so of the GST implementation. Australia and Singapore witnessed only knee-jerk reactions on retail sales when they implemented the GST.
Based on the Treasury’s assessment of the GST incidence on households by different annual income levels, the low and middle income earners of RM4,000 per month and below will incur an additional annual tax expenditure of only RM140 to RM700 per annum.
“As for those earning above RM4,000, they will incur an additional tax expenditure of RM1,550 or RM129 per month. Hence, the BR1M assistance alone is more or less sufficient to offset the higher GST tax expenditure that will be incurred by the low- to middle-income earners, while the personal tax reduction can be used to offset the inflation arising from subsidy cuts,” the research house remarked.
“Furthermore, 70 per cent of the 6.5 million households were spared the average 15 per cent electricity tariff increase in January 2014. The rate for Lifeline band was maintained at the subsidised rate of 21.8sen per kilowatt hour (kWh) and the tariff for consumers using 300 kWh per month was maintained at 33.4 sen per kWh versus the new tariff of 38.53 sen per kWh.”
Based on a survey that is conducted by the Department of Statistics every five years, CIM Research found out that about 70 per cent of Malaysian total household income is spent on non-discretionary items.
Using this as the benchmark, new proposed tax rate in 2015 and assuming a household income of RM3,200, extra loan payment of RM50 due to the higher interest rate, and additional three per cent consumption from GST and inflation in the near term, the household will be left with a disposable income of about RM800 per month which is a decent amount said CIM Research.
While Malaysians have strong purchasing power and the fact that the low- to middle-income earners are well taken care of by government assistance, the higher cost of living will still take away some of the disposable income.