Domestic economy expected to moderate

  • Economy
  • Saturday, 03 Nov 2018

Growth targets: The growth target for next year is marginally higher than the projected 4.8 growth this year.

THE year 2019 will be a period of increased challenges for the already-slowing Malaysian economy, but rest assured that the future is not all doom and gloom.

This is one of the key takeaway points of the Finance Ministry’s Economic Outlook 2019, which coincided with the tabling of Budget 2019.

The report assures that the government is committed to steering the economy towards inclusive growth, benefitting all Malaysians, while carefully dealing with heightening uncertainties in the global environment.

The country’s economy is expected to expand by 4.9% in 2019, buttressed by sound domestic macro-economic fundamentals.

The growth target is marginally higher than the projected 4.8% growth this year.

Domestic demand growth is anticipated to continue moderating, rising 4.8% next year. This will be on the back of sustained private-sector expenditure, which accounts for 72% of the country’s gross domestic product (GDP).

However, public expenditure is forecast to witness a contraction of 0.9% in 2019, primarily due to a significant decline of 5.4% in public investments. The expected fall in government spending is far from surprising, as the Pakatan Harapan-led administration is actively undertaking measures to cut costs by reviewing or cancelling major infrastructure projects.

Economists say that the government will have a tough time balancing the country’s fiscal health and economic growth, moving forward.

MIDF Research chief economist Kamaruddin Mohd Nor tells StarBizWeek that the domestic economy is expected to moderate in tandem with the slowdown in the global economy.

He cites the United States-China trade war, geopolitical uncertainty and the tightening of monetary policy as some of the major factors that will continue to weigh down on the growth of the external sector.

However, Affin Hwang Capital Research chief economist and head of research Alan Tan says Budget 2019 offers “supportive remedy” to sustain domestic economic growth.

He also believes that the 4.9% economic growth target set by the government for 2019 is achievable and realistic.

Meanwhile, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain is cautiously optimistic on the country’s economic prospects next year.

He remains concerned about the potential implications from the rise in trade protectionism globally and the reduced government expenditure in Malaysia.

“Overall, the government is managing the expectations well. However, its growth target of 4.9% in 2019 seems to be slightly over-optimistic.

“Our estimate for next year is about 4.5%, provided the trade war between the US and China does not escalate further,” he says.

The Economic Outlook 2019 foresees exports growing at a substantially lower rate in 2018 and 2019 compared to last year, largely due to the high base effect and external trade uncertainties.

This year, the country’s gross exports are expected to increase by 4.4% to RM976.45bil, driven by the continued demand for manufactured goods.

As for 2019, gross exports growth is predicted to continue moderating to 3.9% at RM1.01 trillion. A rebound in commodity exports and the continuous demand for manufactured goods are expected to support the demand for Malaysian exports.

In comparison, gross exports grew by 18.8% last year, marking the highest growth in 12 years.

The expected slowdown in exports growth is likely to narrow the national current account surplus, which the Economic Outlook 2019 projects at 2% to 3% next year - down from 2.5% to 3% in 2018.

Manokaran says the narrowing current account surplus trend is worrying.

He also warned that the current account may slip into negative territory in the second half of 2019, if the Sino-US trade war worsens.

To date, the US has imposed additional tariffs on US$250bil worth of imports from China. In an apparent tit-for-tat reaction, China has so far introduced tariffs on US$110bil US imports.

Kamaruddin is also concerned about the country’s declining current account surplus.

“The trend is worrying, but the resillence of the external sector will provide support for our trade surplus. Currently, Malaysia has 250 consecutive months of trade surplus,” he says.

Meanwhile, Tan says that while a slowdown in the external environment may have implications on the domestic economy, the final outcome may not be entirely negative.

“Global uncertainties may also mean that imports of intermediary goods by Malaysia might reduce. So, netted off with a slower pace of exports growth, the impact may not be extremely bad as well.

“Overall, it is unlikely for the current account to turn deficit,” says Tan.

The slower economic expansion globally in 2019 is also expected to take a hit on foreign direct investment (FDI) into Malaysia, say economists.

Kamaruddin and Manokaran opine that FDI into the country is likely to moderate against the backdrop of global market uncertainties.

For context, FDI into Malaysia fell 12.7% or RM6bil last year to RM41bil from the record RM47bil achieved in 2016.

Asia accounted for the largest amount of FDI into Malaysia with a share of 63.5%. Within Asia, Hong Kong remained the largest investor country, while China overtook Singapore as the second-largest contributor.

Kamaruddin points out that the global uncertainties and the Sino-US trade war have a silver lining for Malaysia.

“On a positive note, Malaysia could reap the benefit of attracting high-quality investments, given our better offering,” he says.

Echoing a similar stance, Tan says that over the longer term, Malaysia stands to benefit from higher FDIs as multinational corporations could likely look at relocating their operations into countries that are not directly affected by the trade war.

“With the government placing greater emphasis on encouraging new growth areas, particularly through Industrial Revolution 4.0, we could see more FDIs into these areas.

“What this means is businesses will be able to flourish and this will also strengthen the local labour market,” he tells StarBizWeek.

The Economic Outlook 2019 expects the labour market to remain favourable next year, with more jobs being added to the economy.

The unemployment rate in 2019 is projected to be sustained at 3.3%. However, the size of unemployed individuals in Malaysia may likely increase this year and in 2019.

According to the report, the government projects the total number of unemployed persons to reach 511,000 in 2018 and 514,000 in 2019.

In comparison, as indicated by the Statistics Department’s earlier data, there were only 502,600 unemployed persons last year.

Manokaran says the rise in unemployed persons is worrying, as many of them are youths.

“I believe that our industries are simply not growing enough. Also, with greater automation nowadays, we are seeing a lower number of job vacancies to support the labour market.

“The FDIs that we have received over the years have not been very helpful in spurring more employment opportunities, particularly those requiring high skills,” states Manokaran.

Kamaruddin points out that the country needs clear, long-term strategies to strengthen the job market.

“We need policies to address the country’s reliance on foreign workers, promote innovation, increase high-quality investments and improve productivity,” he says.

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