PETALING JAYA: While the domestic economy is showing strong momentum, there are emerging headwinds that have the potential to curtail growth in the second half (2H) of the year, according to economists.
RAM Rating Services Bhd senior economist Woon Khai Jhek, who is projecting gross domestic product (GDP) growth of 5.8% this year from 3.1% last year, said the biggest challenge for the economy would be the rising prices of commodities and production inputs.
This has the potential to dampen business activities and investor appetite, given the higher cost of doing business, according to Woon.
He said there might be some weakening of private consumption demand as well, if such cost increases are passed down to consumers.
“The marked rise in food prices will be especially felt by consumers given that food constitutes around 30% of a typical household’s expenditure. The reprioritisation in consumption demand due to weaker purchasing power would weigh on Malaysia’s recovery momentum in the second half of the year,” he told StarBiz.
One key downside risk is the possibility of the global economy entering a deep contraction, as it deals with the spillover effects from the Russia-Ukraine war and the ensuing surge in inflation and supply-chain disruption.
“A deep contraction in the US economy due to the aggressive tightening of monetary policy to combat inflation will be particularly concerning, as the country accounts for around 10% of Malaysia’s exports.”
Woon added that a steep slowdown in China as a result of its strict Covid-19 containment policy, is also a notable downside risk.
“China constitutes 15% of Malaysia’s overall exports. Volatile capital flows because of the sharp tightening of global monetary conditions from the rapid rise in interest rates, will introduce the risk of financial market instability. This may in turn dampen fundraising and investment appetite.”
MARC Ratings Bhd chief economist Firdaos Rosli said the second half would involve the “pains” in maintaining the economic growth momentum from the first half of the year, as the downside risks emerge from external and internal fronts.
“While external pressures see no signs of abatement, the sluggish labour market recovery, rising business and financing costs and narrowing fiscal space will make growth in the second half more difficult. Uncertainties related to the next general election will not help to fuel the economy.
“Therefore, I do not think that 2022 would be a recovery year for the local economy. This year can be best termed as the policy normalisation year considering that global central banks, including Bank Negara, have been actively normalising interest rates amid economic growth with the reopening of the economy,” he added.
Economists are forecasting GDP growth of 5.5% to 5.8% for the year with domestic demand as the main economic driver. The government is maintaining its economic growth projection of between 5.3% and 6.3% for 2022.
The country’s economy posted an 8.9% growth in the second quarter of 2022 (2Q22) due to strong domestic demand from 5% year-on-year in 1Q22.
OCBC Bank economist Wellian Wiranto said there were considerable downside risks in the second half, primarily on the exports front.
“While exports have been doing well because of the demand for semiconductors and commodities boom, there remain risks of such trends reversing partly because of a global economic slowdown. If the major economies run into recessionary territory, such risks might manifest more rapidly.
“However, we still maintain our view that economic growth, while challenged, will remain broadly supported enough to clock a baseline of 5.7% year-on-year this year. This is in large part due to the momentum from the first half remaining strong, with both domestic consumption and exports doing reasonably well,” he said.
Malaysia’s current account balance recorded a surplus of RM4.4bil in 2Q22 versus RM3bil in the previous quarter, primarily driven by net exports of goods, according to the Statistics Department.
Exports of goods increased by 10% quarter-on-quarter to RM295.8bil from RM268.9bil in the previous quarter. Similarly, imports of goods also showed double-digit growth of 14.6% quarter-on-quarter.
On the inflation front, RAM’s Woon said it would climb to 3% this year from 2.5% last year, with much of the increase largely driven by higher food prices.
“Given the prolonged price pressures faced by businesses, more prevalent cost pass-through to consumers will also be inevitable in the second half.
“The current subsidies in place for RON95 petrol and diesel as well as for electricity and water tariff will help to temper further inflationary pressures. These items collectively constitute close to 13% of the consumer price index (CPI) basket,” he said.
In addition, global food commodity prices have started to ease over the last two months. This would also help to moderate the rise in prices in the second half, Woon noted.
MARC’s Firdaos was looking at an average inflation rate of 2.7% this year, adding that an uptick in inflation was likely in the remaining period of the year.
“We think most inflationary pressures will be via food imports as 56% of the country’s processed food imports is for household consumption,” he said.
OCBC’s Wellian said food prices would likely to continue pushing the headline print up in the very near term, adding however that there may be some signs of softening further out. Already, the supply-demand dynamics of chicken, for instance, has started to improve and that should help to counter the price upticks that we have lived through since the start of the year.
“For the year as a whole, we see inflation averaging around 3% year-on-year,” he said.
Inflation, as measured by CPI, increased 3.4% year-on-year in June, led by costlier food. Headline and core inflation increased to 2.8% and 2.5% respectively in 2Q22, compared with 2.2% and 1.7% recorded in 1Q22