Trumponomics clouds economic outlook

THE re-election of former US President Donald Trump last month has turned the otherwise bullish economic outlook for the global economy into a more uncertain one.

Much now hinges on what the 47th US president will bring to global economic, financial, trade, and geopolitical dynamics.

In essence, while the global economic outlook remains positive, with the Organisation for Economic Cooperation and Development pegging the world economic growth at about 3.2% in 2025, much will depend on what Trump rolls out after he takes office on Jan 20, 2025.

Key concerns include the economic measures that could derail the world order.

Trump’s potential move on immigrants may cause severe disruption in the production of goods and services.

More importantly, new or higher tariffs will cause a rise in aggregate prices, which in turn could lead to higher inflation prints for a prolonged period and may even remove any bets that the US Federal Reserve (Fed) will continue to cut rates beyond what is expected for next year.

This would also suggest that the Dollar Index, which is already up by 6.6% year-to-date, may likely resume its uptrend in 2025.

Trump’s tax plans, which call for a cut in corporate taxes, will provide a boost to businesses, but at the expense of the country’s ballooning debt profile.

The national debt, which currently stands at 99% of gross domestic product (GDP), is expected to grow from 102% at the start of 2026 to 142% by the end of 2035, based on the Congressional Budget Office’s current baseline estimates.

The United States will likely accelerate the pace of borrowings by increasing the size of new US Treasuries sold in the market.

Rising geopolitics tension

The ongoing Middle East crisis between Palestine and Israel has now entered its 15th month, while the Russia-Ukraine war has been raging since February 2022.

Recent conflicts in Syria, the collapse of the Assad regime, and South Korea’s political instability following the president’s impeachment are significant developments that could impact global trade and growth.

Foreign powers are taking advantage of the situation to shape Syria’s future, while in the case of South Korea, the political stand-off may damage the country’s economy if it persists.

Trump’s promise to end the war in Ukraine and reach some sort of settlement in the Palestinian conflict will likely be tough to achieve, based on his recent pro-Israeli appointments to his Cabinet.

Lower Inflation

As inflationary pressures ease, rate cuts – which have been a central theme this year – are expected to remain a key monetary policy among central bankers in 2025.

Certainly, the resilience of the US economy has been a pillar of global growth, as the US Federal Fund Rate (FFR) was cut three times for a total of 100 basis points (bps) to the 4.25% to 4.50% range.

Rate cuts have also been a theme in other markets, led by Canada’s move to lower rates by 175 bps, the Reserve Bank of New Zealand’s 125 bps cut and the European Central Bank’s (ECB) 100 bps cut.

Among Asian countries, the Philippines and South Korea have been the most aggressive, cutting rates by 75 bps and 50 bps, respectively, followed by China with a 35 bps reduction, and both the Bank of Thailand and Bank Indonesia with 25 bps cuts.

Malaysia, along with Vietnam, Australia and India, has left rates unchanged, while the Bank of Japan remains one of the aggressive ones among developed markets, raising rates by 25 bps and signalling further hikes in 2025.

Despite Trump’s rhetorics on tariffs, trade and economic policies, expectations are that the Fed will continue with rate cuts in 2025, likely reducing rates by 50 bps to a range of 3.75% to 4.00%.

The ECB is seen lowering rates by another 100 bps, while China is expected to cut rates further by 40 bps to 60 bps to between 2.5% to 2.7% next year.

For 2026, the Fed now estimates two rate cuts of 25 bps each, while for 2027, the Fed is looking at just one 25 bps cut.

Interestingly, the Fed now believes that the core personal consumption expenditure (PCE) inflation will increase to 2.5% next year, up from 2.4% this year. The target of 2.0% core PCE will now only be achieved in 2027, not 2026, while long-term FFR forecast has now been pushed higher to 3.0% from 2.9% previously.

The Fed’s revised projections suggest that inflation is here to stay and perhaps the United States is in for a longer period of sustained inflationary pressure.

A slower growth

The Malaysian economy slowed down to register a GDP growth of 5.3% year-on-year (y-o-y) in the third quarter of 2024, which was lower than the preceding quarter’s y-o-y growth of 5.9%.

Going into 2025, the economy is humming with a relatively strong momentum, led by growth in private consumption, robust investment and a relatively stable political environment.

In terms of numbers, the government’s forecast of a GDP growth of between 4.5% and 5.5% for 2025 is seen to be within reach, while the targeted inflation rate of 2.0% to 3.5% is deemed pessimistic as it will depend on the subsidy rationalisation plan for RON95 set for rollout next year.

The budget deficit target of 3.8% will likely be met, supported by the projected fiscal spending in 2025.

Additionally, the government’s debt-to-GDP ratio is seen trending lower due to higher growth in nominal GDP against growth in total federal government debt.

On the external front, Malaysia’s trade balance, which is expected to drop by 40% to 45% this year, may deteriorate further, given the potential trade disruptions and tariff impositions by the incoming Trump administration.

The reform agenda

The unity government’s reform agenda has been slow, leaving much to be desired.

After the 15th general elections in 2022, the first window of opportunity for reforms came when the government tabled Budget 2024, and another opportunity passed when Budget 2025 was tabled two months ago.

The promised subsidy rationalisation, particularly for RON95, is now expected to take place in June next year.

However, the re-introduction of the Goods and Services Tax has the slightest window available in next year’s budget, if at all it is going to be a reality during the current unity government’s tenure.

Malaysia’s efforts to raise wages have also been slow, with the new wage structure of RM1,700 per month falling short of expectations.

Efforts to raise wages have been met with much resistance from employers, with the current compensation of employees as a percentage of GDP estimated to reach just 33.5% next year.

The government ought to be more aggressive in rolling out economic reform measures to put the country on the right track.

FDIs and reserves

Malaysia saw a significant growth in approved investments as total capital investments increased 10.7% y-o-y to hit RM254.7bil.

However, the growth was more domestic-oriented as domestic investments jumped 44.2% y-o-y to RM148bil, while foreign direct investments (FDIs) dropped 16.3% y-o-y to RM106.7bil.

According to Bank Negara statistics, Malaysia saw a 39.3% jump in net FDIs to RM29.1bil in the nine-month period ended September 2024, from RM20.9bil in the same period last year.

Gross inflows surged by 22.7% to RM219.9bil, while outflows increased by 20.5% to RM190.9bil.

Based on Bank Negara’s latest figures, Malaysia’s foreign reserves increased by 3.6% to US$118.3bil at the end of November 2024, from US$113.5bil at the end of 2023.

However, in ringgit terms, reserves fell by 6.6% to RM486.2bil from RM520.8bil, with the local unit appreciating by 3.3%.

Official data, which includes net short positions and foreign currency loans, suggests that actual net reserves only increased by 1.5% to US$76.4bil as of October 2024.

Hence, while the official headline gross foreign reserves look rather healthy, the devil is really in the details when the data takes into account the net short positions and borrowings.

Ringgit fairly valued at RM4.50.

There are several ways to determine the fair value of the ringgit, with the most prominent being the nominal effective exchange rate (NEER) and the real effective exchange rate (REER).

In simple terms, the REER measures a currency against the weighted average values of other foreign currencies, adjusted for inflation, while the NEER is does not take into consideration inflation data.

Based on the last observed value of the NEER and REER at 103.9 and 101.1, respectively, as at the end of October when the ringgit was trading at RM4.3815 to the US dollar, the local currency is deemed to be slightly overvalued.

The fair values of the ringgit using the NEER and REER methods are in essence approximately RM4.55 and RM4.43, respectively.

This perhaps reflects the current value of the ringgit or around RM4.50 to the dollar, which sits between the NEER and REER estimates .

However, currencies can be volatile, and both the REER and NEER gyrate depending on the value of the ringgit and the weighted average of other foreign currencies.

Over the last five years, the NEER and REER have ranged from 105 to 92, suggesting that the ringgit can swing by up to 13% depending on market sentiment and other factors that impact market demand and supply.

This is about the same range that we saw in 2024 when the ringgit fell as much as 4.4% at one stage, but later gained as much as 10.2% by the end of September.

OPR maintained at 3.00%

Bank Negara has maintained a stable monetary policy stance, despite pressures from other central banks that have previously been aggressive in raising rates and are now in the mood to lower key lending rates on the back of disinflationary pressures.

For Malaysia, Bank Negara is likely to move the needle only if growth accelerates or decelerates much faster than expected, or if inflation data shows elevated levels of aggregate prices or a prolonged period of low inflation prints.

Hence, given that the current overnight policy rate (OPR) is supportive of growth and at an appropriate level, the rate is expected to remain unchanged in 2025.

In summary, economic-wise, the world is on a stronger footing than it was 12 months ago, given the falling interest rates and disinflationary pressures are aiding both investment and consumption.

However, geopolitical tensions and Trumponomics may alter the global outlook, given the president-elect’s views on tariffs, trade and border issues.

Domestically, growth will be slower in 2025 mainly due to the higher base and the potential effects of Trump’s tariff policies on imports, especially from countries that are major exporters to the United States.

Malaysia’s economy is expected to grow a modest 5% next year, with domestic consumption and investments leading the way.

The government’s subsidy rationalisation efforts are expected to help manage the budget deficit more sustainably, while political stability over the last couple of years has brought in substantial FDIs, likely continue into 2025.

With OPR expected to remain steady, the ringgit looks fairly valued at this stage, although it may strengthen, given the expected decline in the US FFR, or weaken if a flight to safety or geopolitical tensions and tariffs dominate global markets as the Fed turns hawkish.

Next week, this column will present an analysis of markets and what to expect in 2025.