Analysts expect moderate GDP growth for M’sia in 2H

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Malaysia’s GDP  could moderate further in 2H16 as external and domestic headwinds are expected to continue hampering its recovery momentum going forward. — Bernama photo

Malaysia’s GDP could moderate further in 2H16 as external and domestic headwinds are expected to continue hampering its recovery momentum going forward. — Bernama photo

KUCHING: Malaysia’s gross domestic product (GDP) could moderate further in the second half of 2016 (2H16) as external and domestic headwinds are expected to continue hampering its recovery momentum going forward.

Of note, last week, Bank Negara Malaysia announced that Malaysia’s GDP rose four per cent in the second quarter of 2016 (2Q16), weighed down by a continued decline in net exports and a significant drawdown in stocks despite the stronger expansion in domestic demand.

Ratings agency RAM Ratings, expected Malaysia’s growth to come in at 4.2 per cent in 2016, marginally lower than its initial projection of 4.4 per cent.

“Private consumption has provided much-needed upside support to overall economic resilience in 1H;however, domestic and external headwinds – which have been constraining growth momentum this year – are set to remain through the second half.

“We believe that this will create a drag on the pace of recovery amid fresh downside risks from external sources,” it added.

Looking ahead, RAM Ratings pointed out that the onset of a potential European downturn triggered by Brexit and the further weakening of key North Asian export destinations would constrain any growth potential from external demand. In a recent report, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) highlighted that the recent decline in oil price and Brexit vote near the end of June were likely to halt positive economic momentum gained in June.

“Most of June economic data globally has been a surprise to most economist, including Malaysia’s data where exports grew by 3.4 per cent y-o-y against economists’ expectation of a contraction by 3.7 per cent y-o-y, while industrial production expanded by 5.3 per cent y-o-y against forecast of 2.3 per cent y-o-y. However, with the recent decline in oil price and Brexit vote near the end of June, we opine that the surprised numbers in June will be transitory,” it opined.

“At the moment, we are maintaining our GDP forecast for the whole year of 2016 at four per cent while remaining our expectation for GDP growth in 3Q16 at 4.1 per cent y-o-y,” it added.

Meanwhile, AllianceDBS Research Sdn Bhd (AllianceDBS Research) highlighted that while downside risks from weak external macro and commodity prices have yet to recede, efforts to sustain domestic demand growth are already in place.

“The Employees Provident Fund voluntary employee’s contribution rate cut, special individual income tax relief announced during Budget 2016 revision and BR1M transfer cumulatively add up to around RM13 billion household expenditure – boosting private consumption percentage point contribution to GDP by as much as one per cent this year.

“Besides, the surprise Bank Negara (BNM) Overnight Policy Rate cut in July by 25bps to three per cent is a pre-emptive measure to support domestic consumption,” it said.

It added that although unemployment rate in March and April spiked to 3.5 per cent (2010 to 2015 average at 3.1 per cent), it believed that BNM would monitor the domestic demand situation in assessing the need for further monetary easing.

Aside from that, it noted that headline inflation remained manageable as low fuel pump prices cushion cost-push inflation from subsidy withdrawals and excise duty hikes since 2H15, therefore providing policy space for BNM to maneuverer.

“While the government remains committed to balance its fiscal position by 2020 (2016e estimate at minus 3.1 per cent to GDP), thereby limiting upside in public expenditure contribution to GDP growth, we expect targeted fiscal policies to stimulate private consumption during Budget 2017 announcement in October.

“If the fiscal position allows, the government could even consider lowering the Goods and Services Tax rate from current six per cent level for a period of time as a short term measure to spur household expenditure. However, this measure would be dependent on the projection of global crude oil price sustainability in the coming years in order to make up for the forgone revenue from GST, which is substantial at 18 per cent contribution of fiscal revenue,” the research team said.

“In short, external macro condition remains fragile amid muted global growth prospects and financial markets volatility arising from global monetary policy divergence. The key strategy is to ensure private consumption stays resilient as domestic investments remain anchored by on-going transport-related infrastructure spending,” AllianceDBS Research opined.

All in, it expect Malaysia’s 2H16 GDP to average around 4.1 per cent, thereby registering full-year GDP growth of 4.1 per cent.

“Our inflation forecast remains at three per cent for this year (2.1 per cent in 2015) on cost-push price pressures,” it added.