THE intensifying trade war, especially between the US and China, and its negative impact is leading to major cuts in growth forecasts.
In the case of Malaysia, a full-blown trade war could plunge economic growth to 3.7% next year from 5%, said DBS.
Such a development, if it materialises, comes at a bad time when Malaysia is having problems of its own.
Pressing concerns for Malaysia are high debt – caused by rising contingent liabilities – and revenue shortfall – caused by the switch from the goods and services tax to the sales and services tax.
While we seek solutions for such problems, what are we to do regarding the trade fights of major nations?
There may be some diversion of trade and production base to Malaysia which will still suffer from the overall hit to global growth.
With total trade accounting for almost 140% of gross domestic product (GDP), Malaysia is sensitive to trade shocks, where trade war is a potential trigger.
“Our sensitivity analysis (a way to predict the outcome of a decision with a certain range of variables) indicates that a 1 percentage point drop in world trade growth will shave 0.7 percentage point off Malaysia’s GDP growth,’’ said Suhaimi Ilias, group chief economist, Maybank Investment Bank.
A full-blown trade war can reduce world trade by 4% and wipe off 0.4 percentage points (about US$800bil) of global GDP, said Oxford Economics.
“Our base case GDP growth estimate is 4.9% for 2019 (estimated 5.2% in 2018); the worst case is around 4% if the global economy slips to a sharp slowdown from the damage inflicted by a full-blown trade war,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
A full-blown trade war amounts to a situation when tariffs are fully implemented across the board, and their impact is broadly felt on the economies.
The US is not just picking on China but also on its allies.
“A hit of 1%-1.5% on GDP growth for Malaysia seems a reasonable assumption; there could be gains from production (from China) being switched to Malaysia where many multinationals (MNCs) already have plants,” said Pong Teng Siew, head of research, Inter-Pacific Securities.
The reallocation of global production bases out of China – to avoid US tariffs on Chinese goods – to South-East Asia may partially help offset the dampener on growth caused by the trade war.
This shift would likely lead to trade growth in Malaysia, Vietnam, Myanmar and Laos, William Ma Wing-kai, managing director of Kerry Logistics Network, was quoted as saying by South China Morning Post (SCMP).
Starting in the second half of the year, this outbound trend is expected to last for many years to come, said Ma.
Some expect any gain to be temporary. “We do not have the huge land and labour resources to replace China as the hub for offshore production,” said Pong.
Overall, foreign direct investment flows into Malaysia is expected to remain subdued this year.
“This is due to increasing focus on quality investments in the targeted ecosystems that should yield positive impact on the domestic economy.
“We expect the strategy to zoom in on developing local supply chains to support MNCs,” said Anthony Dass, chief economist, AmBank Group.
Despite the volatilities on the global front, a total of 402 projects with a proposed investment of RM75bil, came in as at May.
“Our focus to be a leading exporter of food and beverage products can drive investments and attract established brands with the right support for local companies,” said Dass.
If the trade war drags on, regional trade may slow down, especially as China’s economic growth gets impacted.
“There is a very real chance (China’s) growth could slow very sharply to 5% or even lower in the next few years, unless Beijing takes strong steps to mitigate the risk,” wrote David Brown, chief economist, New View Economics, in SCMP.
“The trajectory towards slower growth is already set; 5% is very possible.
“For such a large economy, that is still very rapid. If it is no longer going to be the factory of the world, China shall not need to import as much raw materials or energy, and that will slow trade across the region,” said Pong.
Who can fill in such big shoes?
“It has been a fear for some time that there may not be another China-style US$586bil stimulus following the 2008 financial crisis to rescue the world if another crisis hits.
“The US is now strong enough but has brought in tariffs that will prevent it from sucking in more imports while it grows stronger,” said Pong.
Columnist Yap Leng Kuen fears the impact on dwarves as the giants slug it out.