Friday, October 23

‘Global economy could be entering a new growth cycle’

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Analysts believe Malaysia’s government budget deficit in 2021 will likely remain large to accommodate the ongoing restrictions until a vaccine is widely available. — Bernama photo

KUCHING: The global economy could be entering a new growth cycle, which may last another seven to 10 years as we move into 2021, analysts at RHB Research Sdn Bhd (RHB Research) forecast in a recent report.

“It is, however, not without any downside risks, as any unexpected event such as another black swan could end the cycle early.

“One of the downside risks has been the building up of debt in emerging markets and developing economies due to the low borrowing cost burden. Since 2010, total debt in these economies has risen by 54 percentage points of GDP, to a historic peak of about 170 per cent of GDP in 2018, according to research by the World Bank.

“The study shows that simultaneous buildups in public and private debt have historically been associated with financial crises that resulted in particularly prolonged declines in per capita income and investment.

“In our view, as long as borrowing costs continue to stay low, the rising debt issue remains manageable,” the research team said.

It also pointed out that a financial asset bubble continue to balloon, and an unexpected sharp rise in inflation that forces central banks to hike rates more than expected could poke the bubble, resulting in a devastating impact on the global economy.

On the growth performance in the Asean region, along with a pick-up in global economic growth, it believed Asean’s exports are likely to recover in 2021, after a hard hit in 2020.

“This, together with policy measures to stimulate domestic demand, suggests that economic growth in Asean-5 countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand) is likely to bounce back in 2021.

“As a result, we expect Asean-5’s real GDP to record a growth of 6.3 per cent in 2021, a recovery from a contraction of 4.1 per cent estimated for 2020 (3.8 per cent in 2019),” it said.

RHB Research also upgraded Malaysia’s economic growth projection to seven per cent y-o-y for 2021 (from four per cent y-o-y earlier), while keeping the 2020 forecast unchanged at four per cent decling.

“The timing of the vaccine deployment plays a pivotal role in shifting our outlook for next year. This would likely be aided by the earlier monetary policy easing and continued government support, especially towards the earlier part of 2021,” it explained.

“Indeed, the government budget deficit in 2021 is likely to remain large to accommodate the ongoing restrictions until a vaccine is widely available.

“We expect the fiscal deficit to stay high at five per cent of GDP in 2021, albeit smaller than the 6.5 per cent deficit projected for this year,” it added.

Meanwhile, it noted that private consumption is set to record a strong growth next year, a rebound from a contraction in 2020, aided by a low base effect as well as better economic sentiment as the public expects restrictive measures to end.

“Investment growth next year is also set to rebound as well in 2021, after a sharp drop in 2020.

“Support would come in the form of a higher base effect and contribution from more resilient sectors, although overall growth is expected to still be less than ideal. For private investment, we expect the utilisation rate to improve and investment activity to pick up towards the latter half of 2021 as the economy gains traction.

“Meanwhile, growth of public investment is expected to remain flattish,” it said.

It also expect Malaysia to record an inflation in 2021, alongside the rise in global oil prices as well as stronger demand-pull factors.

“The inflation rate is forecast at two per cent, a reversal from the negative one per cent projected this year,” it said,

“On account of a recovery in economic growth and rising price pressure, we expect the central bank to start normalising its monetary policy as well next year. As a result, we priced in a hike of 25bps in the OPR to two per cent towards the latter part of 2021.

“For the rest of this year, we think BNM is likely to stay pat, keeping the interest rate at 1.75 per cent, considering the significant support that has already been provided,” RHB Research opined.