PETALING JAYA: The prospects of the Malaysian economy are still favourable but rising energy prices, persistent global imbalances as well as fears of an avian flu pandemic will remain as risks to expansion, said CIMB Securities.
In a report, it said the country’s economic performance started off on a weaker footing this year, with real gross domestic product (GDP) growth of 5.3% in the first quarter.
Private consumption was also soft due to the cumulative effects of higher petrol prices and interest rates, it added.
“Looking ahead, we expect a fairly even distribution of growth for the remaining three quarters, with growth expected to turn weaker in the second quarter,” CIMB said, estimating GDP growth at 5.3% this year.
The brokerage said that major global indicators were still heading north, reinforcing hopes for a steady economic expansion, albeit at a more sedate pace, in the second half.
CIMB said the Organisation for Economic Co-operation and Development composite leading indicators (CLIs), which were designed to provide early signals of turning points in economic activity, were now in their 11th consecutive month of expansion since May 2005.
“The current expansion is the longest in recent years. Most of the major seven economies such as the US, Japan and the European Union continued their healthy expansion in March this year,” it said.
The brokerage expects the uptrend in CLIs to moderate in the second half as the lagged dampening impact of high oil prices and interest rates kick in.
CIMB said the US economy grew a robust 5.3% in the first quarter of this year, underpinned mainly by domestic demand and investment spending by businesses coupled with the post-Katrina reconstruction works.
“The US economy is expected to slow down to a more sustainable pace given the cooling of the housing market and higher interest rates and energy prices,” it added.
It noted that after the latest interest rate adjustment, the US Federal Reserve (Fed) had not provided a definite answer on what to expect in the coming months although the stronger than expected consumer price report for April stirred fears that it would raise rates by more than what the market had priced in.
Japan, on the other hand, continues to see steady economic recovery, with a higher-than-expected 3.1% year-on-year GDP growth in the first quarter.
The rising capital investment reflected the high corporate profits and favourable business sentiment while the uptrend in private consumption was underpinned by a firming labour market, which was stimulating national income and consumption, CIMB said.
The International Monetary Fund declared that Japan had come out of a decade-long “deflation” gap, given the recent positive price data and the underlying strength of the economy, it added.
Investors, nevertheless, are keeping an eye on when the Bank of Japan (BOJ) would start raising the overnight uncollateralised call rate after it ended its quantitative easing stance in March.
CIMB added that the EU area continued to expand despite skyrocketing oil prices and the firming euro.
The European Central Bank (ECB), it added, raised its main refinancing rate earlier this month and was ready to act if growth and oil prices threatened inflation.
Meanwhile, emerging Asia showed a mixed growth performance in the first quarter in an environment of benign financial market conditions amid monetary tightening, it said.
The brokerage said exports rebounded in most countries buoyed by a surge in electronics demand but the collective impact of higher borrowing costs and fuel prices had crimped domestic demand in Thailand and Indonesia,
CIMB said most central banks, including Indonesia and Thailand’s, had raised their interest rates aggressively to limit inflation, while in countries where the inflationary pressures had been moderate, the rate increases were less pronounced.
While China remained a runaway success, the People’s Bank of China, in a surprise move, raised its benchmark retail lending rate last year and subsequently implemented credit tightening measures such as raising the down payment for luxury properties and sales tax on the transaction of second-hand apartments, as well as assigning higher risks to real estate loans, it said.
“Banks in China were also urged to tighten lending to property developers, requiring developers to put up a minimum 35% of the cost of projects from their own funds,” it said, adding that it was reported that Bank of China might also raise the reserve requirement to curb lending.
Looking ahead, signs of stress in both the financial and commodity markets could trigger unwarranted price volatility and capital outflows from the emerging markets, CIMB said, adding that this was indicated by the recent sharp price correction for equities, commodities, metals and minerals.
Regional currencies were also bashed down, as speculative short-term positions were unwound, it said. The brokerage added that high energy prices remained the prime risk as supply-side factors were driving prices upwards, which could exacerbate the impact on global activity.
Further tightening of global financial market conditions would test the resilience of regional financial markets while global imbalances would result in volatility in exchange rates and capital flows.
“The wild card is still the possibility of an avian flu pandemic, which could have a significant economic impact on the region,” CIMB said.