BANK Negara has lowered Malaysia’s economic growth forecast for 2018 to 5% from its earlier estimate of 5.5%-6%. For those in the loop, the move is largely unsurprising.
After all, the country’s economy has expanded below the 5.5%-level over the last two consecutive quarters. In fact, Malaysia’s gross domestic product (GDP) growth has been decelerating since the third quarter of 2017, when the economy grew by 6.2% year-on-year (y-o-y).
The softer growth, given the fall in government development expenditure in the second quarter and the lacklustre performance of liquefied natural gas (LNG) and crude palm oil, meant that the earlier estimates could not be met. Furthermore, global purchasing manager indices and export volumes have been moderating.
In the second quarter of 2018 (2Q18), GDP growth came in at 4.5%, which was below the Bloomberg consensus of 5.2%. In comparison, GDP growth was 5.8% in the corresponding quarter of 2017 and 5.4% in 1Q18.
According to Bank Negara, supply disruptions in the second quarter resulted in the slower economic growth.
“Private sector activity continued to be the primary driver of growth as both private consumption and investment expanded strongly during the quarter.
“Growth in the mining sector contracted due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather conditions.
“Nevertheless, major economic sectors, notably the services and manufacturing, remained supportive of growth,” says the central bank in a statement.
On the demand side, growth was largely supported by the increase in private consumption (8%), private investment (6.1%) and public consumption (3.1%). However, public investments contracted 9.8% y-o-y, which also marks the third consecutive quarter of decline.
Bank Negara is working on a mid-term strategic plan, to further sustain the country’s economic growth moving forward.
Governor Datuk Nor Shamsiah Mohd Yunus hints that the plan could include the introduction of new forms of taxes to raise higher revenue for the government.
This is mainly to address the shortfall in revenue, following the removal of the goods and services tax (GST).
The central bank’s forecast of 5% for the year dismisses any notion of the country slipping into a contraction in the fourth quarter. Despite the moderation in GDP growth, Shamsiah expects the country’s growth to be sustained, supported mainly by private sector activity.
Earlier this month, Bank Islam Malaysia chief economist Mohd Afzanizam Abdul Rashid has warned about Malaysia sinking into its first recession in 10 years by end-2018 or next year.
Citing the current bond yield curve, Afzanizam believes that the next economic downturn is oncoming and urged the government to cut taxes, aside from easing the monetary policy.
A country is considered to be in a technical recession if the economy recorded two consecutive quarters of negative GDP growth. The negative growth is calculated by looking at the quarter-on-quarter change in GDP.
The last time Malaysia registered a technical recession was in the fourth quarter of 2008 (-3.5%) and the first quarter of 2009 (-7.8%), amid the 2008 recession.
Institute for Democracy and Economic Affairs senior fellow Carmelo Ferlito also warned about a potential recession, adding that it would be a property market-driven crisis.
Concurring with Shamsiah, Malaysian Institute of Economic Research senior research fellow S. Nambiar does not think Malaysia will slip into a recession.
However, he indicated that a slowdown in economic expansion is likely.
“There are some factors that are not conducive for growth. For example, the switch from the GST to the sales and services tax (SST). This might mean some costs for the small and medium enterprises, aside from the fact that the SST might not bring in the kind of revenue that the GST brought in.
“The cut back in projects and infrastructure investments might also mean a reduction in multiplier effects. Besides, some of the contingent liabilities might crystalise into the government’s balance sheets and increase the debt level.
“All of these are part of the necessary costs of restructuring the economy,” Nambiar tells StarBizWeek, adding that Malaysia’s economy could grow by 4.8%-5% this year.
AmBank Group chief economist Anthony Dass also believes that a slowdown in economic growth will take place, rather than a contraction leading to a recession.
“Looking at 2018 full-year GDP outlook, our projection for Malaysia’s GDP is 4.8%-5% while for 2019 is 4.2%-4.4%, on the back of a global growth of 3.7% for 2018 and 3.6% for 2019,” he says.
Anthony adds that the possibility of a recession will driven more by “external noises as opposed to domestic issues”.
The key threat is a full-blown US-China trade war.
“A full-blown trade war added with emerging market debt crisis that becomes contagion may hit household and business sentiments. As a result, it may risk sparking household debt crisis and a strong correction to the property prices, forcing the bubble to burst,” says Anthony.
In an earlier report by The Star, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain cautioned that the country could fall into a recession within the next two years if the trade war goes full-blown in 2019.
In providing support to the slowing economy, Nambiar foresees the government introducing a slew of fiscal measures including new ways to raise tax revenue.
“That said, I believe the government will be careful not to throw the burden of the new revenue-raising measures on the bottom 40% population or those earning less than RM4,360 per month. In reviving the industrial and services sectors, I would also expect the government to switch into a more pro-active mode towards the close of the year or starting next year,” he says.
In a note, AllianceDBS Research points out that fiscal reforms such as the removal of GST and the standardisation of minimum wage across the country will likely provide favourable domestic demand conditions that will support private consumption growth towards the end of the year.
“However, the boost in private consumption growth is likely to be insufficient to keep GDP growth above the 5% level.
“The moderation in manufacturing sector’s production and possibly a drop within the construction sector due to the cancellation or postponement of mega projects will keep GDP growth subdued,” says the research house, which lowered its 2018 GDP forecast to 4.8% y-o-y from 5.6% previously.
Moving forward, Anthony expects the country’s public investment to be weak due to lower capital spending by public corporations.