Kenanga expects GDP growth to moderate in 2H18

KUALA LUMPUR: Kenanga Research expects Malaysia's GDP growth to moderate in 2H18 to 4.7% from 4.9% in 1H18, partly due to the negative impact of the US-China trade war.

"Although the impact on Malaysia remains uncertain, the latest PMI survey hints an inevitable slowdown in exports as global trade slows," it said in its Tuesday report.

It added that the new government's reintroduction of fuel subsidy and a tax holiday will bolster domestic demand although the reintroduction of a 10% Sales and Services Tax (SST) on manufacturing goods could diminish exports' competitive edge.

Despite a likely growth upturn in 3Q18, Kenanga forecasts full-year GDP growth to slow to 4.8% from 5.9% in 2017.

The research house said Malaysia's Purchasing Managers Index (PMI) rose above the 50-point level in August due to faster expansion in output, owing partly to the three-month tax holiday.

The PMI of 51.2 was the highest level since November last year, and the last time it had risen above the neutral 50-point level, which indicates expansion, was in January this year.

According to the research house, new orders rose for the first time in seven months due to strong market demand and customers placing their orders during the tax holiday before the SST came into effect.

"According to IHS Markit, firms hiring rose for the third consecutive month in response to expansion in new orders but the rate of job creation eased to a fractional pace. 

"Meanwhile, level of positive sentiment in August was the strongest in four months due to expected improvements in future sales and demand conditions."

However, new export orders broadly stagnated in August, partly reflecting slowing global trade conditions. 

The ringgit put pressure on input prices as it traded lower in August against the US dollar at between RM4.07 and RM4.11 versus RM4.02 and RM4.08 in July.

Kenanga said input costs would further increase with the SST taking effect, compelling manufacturers to pass higher output cost down the value chain to end users. 

"We expect the inflationary impact of a rising cost push inflation would partly be mitigated by the relatively low and stable fuel prices courtesy of the return of subsidy. 

"This would provide enough room for Bank Negara Malaysia (BNM) to leave the overnight policy rate at 3.25% this year to support economic growth," it said.