Propping up domestic sentiment

SEVERAL major economies are teetering on the brink of recession, and for a small, trade-reliant country like Malaysia, it is highly impossible to escape the impending crisis unscathed.

In fact, economists are saying that the strong economic recovery seen in Malaysia so far – an expansion of 6.9% in the first half of 2022 – may have reversed course.

As such, the new Malaysian government, post-15th General Election, will have a lot on its plate to deal with.

Whichever party forming the government will need to navigate a decelerating economy and prop up domestic sentiment.

Manufacturing activities have shrunk for two straight months, and worryingly, Malaysia and Myanmar were the only Asean countries that have experienced a contraction in October’s Purchasing Managers’ Index (PMI).

Last month, a member of the National Recovery Council called for “aggressive action”, pointing out that small and medium enterprises are suffering due to slowing business.

Meanwhile, continued interest rate hikes are causing consumers to scale back on spending. Considering that Malaysia is significantly driven by private consumption, a more prudent consumer spending would weigh the economy down.

The good news is that inflationary pressures have shown signs of abating. Supply chain issues are easing and companies have been delivering their backlog orders.

Malaysia also remains supported by strong exports performance. In September, exports expanded 30.1% to RM144.3bil, marking the highest monthly value for the month of September.

The strong performance was partly due to the weak ringgit that has fallen by over 13% year-to-date.

In less than a week, the gross domestic product (GDP) figures for the third quarter of 2022 (3Q22) will be unveiled.

Economists, in general, are expecting another strong performance, potentially surpassing the 8.9% year-on-year (y-o-y) growth seen in 2Q22.

Earlier in the first quarter, the economy grew by 5% y-o-y.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie’s “crude estimate” indicates that the economy has expanded by 9.8% to 10.5% in 3Q22, amid the weakening global environment.

Such a growth is partly aided by the low-base effect, according to him.

“Robust domestic demand is still underpinning the economy. The services sector will be supported by resilient strength in consumer spending.

“The continued expansion in manufacturing is due to the still strong exports of electronics and electrical sector.

“The mining sector will see a strong turnaround while the construction sector will recover gradually due to high cost of building materials, the shortage of workers and slow launching of new housing developments,” Lee tells StarBizWeek.

TA Research, in a note yesterday, says that the GDP is likely to have grown by 10.5% in 3Q22.

Referring to Bank Negara’s latest statement on the overnight policy rate (OPR), TA Research notes that the central bank sounded optimistic over the domestic performance in the third quarter.

It says economic indicators to date are pointing to continued growth, underpinned by support from private sector spending.

“In addition, labour market conditions and income prospects remain positive, with the unemployment rate declining further.

“Moreover, tourist arrivals have increased following the reopening of international borders and will further lift tourism-related sectors.

“So far, the full set of third-quarter data that has already been published are trade performance and crude palm oil production, which indicate a strong 3Q22 GDP,” it says.

Amid the strong growth projections, an economist says that it makes more sense to evaluate the economic performance on a quarter-on-quarter (q-o-q) basis.

HELP University economist Paolo Casadio explains that the q-o-q measure would eliminate biases coming from the low-base effect, and thus, highlight the “actual traction” of the economy.

In 2Q22, the Malaysian economy grew by 3.5% in terms of seasonally adjusted growth, compared to 1Q22.

This marks a slightly slower growth than 1Q22’s rate of 3.8%.

Looking ahead, Casadio concurs that Malaysia has entered into a period of “economic slowdown”.

“There is no ‘decoupling’, if the major economies are headed to a recession. The timing and the degree of the crisis can, however, be different,” he says.

He adds that Asian economies have experienced a lag of about two quarters due to the impact of Covid-19.

“This lag just extended recently, based on the strong momentum of the Malaysian economy.

“Accordingly, in 2023, the Malaysian economy will show more clear similarities with what is going on in Europe or in the United States,” says Casadio.

The economist points out that the government’s fuel subsidy programme has avoided Bank Negara from facing an extreme trade-off between curbing inflation or creating a recession.

“Bank Negara can leverage on both timing and lower inflation to coordinate with the fiscal policy smoothing the hits coming from the adverse international scenario

“The recent weakness of the ringgit (mainly against US dollar and Singapore dollar) is contributing to dampen the impact coming from more restrictive monetary conditions,” he says.

Meanwhile, SERC’s Lee says that the normalisation of domestic demand will happen going into 4Q22 and 2023.

This is due to the waning effect of pent-up demand as inflation and high cost of living bites, the disappearing of favourable base effect and the expected moderation in external demand as reflected in global PMI performances.

“The biggest threat to the Malaysian economy is the risk of global recession, especially in the US and Europe, due to the persistent tightening monetary policy to bring down stubbornly high inflation.

“These negative external spillover effects will dampen the demand of our exports; induce capital flows and volatility in the financial and exchange rate markets.

“On the domestic front, the continued inflation pressures and cost of living will crimp consumer spending in addition to the lag monetary impact of interest rates increases of 100 basis points (bps) will have a disproportionate impact on consumption and business activities,” he says.

Bank Negara has raised its OPR for four straight rounds this year, bringing the rate from 1.75% to 2.75%.

“At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth,” it says.

Affin Hwang Asset Management senior director of fixed income Esther Teo expects Bank Negara to “normalise monetary policy” by another one or two times by 25 bps to 50 bps.

Commenting on the local bond market, Teo expects the market to trade range bound in the near term at least until the upcoming elections, as investors prefer to stay on the sidelines.

“Over the medium term, we expect local bond yields will remain under pressure, influenced by external developments such as high global inflation, hawkish global central banks including the US Federal Reserve, volatile global bond yields such as US Treasuries, geopolitical tensions and also risk of foreign fund outflows.

“Nonetheless, domestic support should provide some buffer,” she says.