MARC today released its report on the Economic Outlook for 2H2013, entitled “Normalisation Setting In”.
Economic malaise in Europe is hurting Asian exports, putting pressure on their economies. Adding to that, jitters over global economic weaknesses are being amplified by softer macro numbers in China in recent months. Similarly, the Indian economy looks wobbly at this juncture. Graft scandals which undermined Prime Minister Manmohan Singh's efforts to revive investments and the twin deficit problem have affected confidence.
It is not all gloom. The US economy is recovering well despite occasional worries on its budget issues. The labour market is on the mend, although long-term unemployment remains a thorny problem. The only concern is the financial market’s reaction and the impact of the Federal Reserve’s (Fed) plan to scale back bond purchases. Japan's economy is also picking up pace and confidence on the success of “Abenomics” has improved the financial market’s perception of Japan, pushing its equity market up drastically before recent corrections took place.
The Malaysian economy softened in 1Q2013 with GDP growth decelerating to 4.1% year-on-year (y-o-y) (4Q2012: +6.5%) as the impact of weaker trade performance continued to put downward pressure on net trade. Going forward, we do not anticipate a significant rebound in commodity prices as external headwinds have yet to fully dissipate. That said, further deep corrections in prices may also not be likely for the rest of 2013.
While external demand is still hitting speed bumps, domestic forces remained relatively unperturbed with investments and private consumption continuing to hold the fort for the economy. Spurred by mega projects, investment momentum remains respectable and will likely grow at a double-digit rate again in 2013. Recent statistics, however, have indicated that the normalisation process is setting in. Overall, we foresee another year of a respectable growth of circa 10% in private investments in 2013.
Private consumption remains a strong pillar of the domestic economy, contributing about 3.8 percentage points to the headline growth and expanding by 7.5% in 1Q2013, up from the 6.2% expansion in the preceding quarter. On the other hand, inflation numbers have not stirred any excitement in 1H2013. Inflation (growth in CPI) has averaged 1.6% y-o-y in the first five months, attributed to rising food prices which climbed by an average 3.2% between January and May 2013 (4Q2012: 2%).
With other countries in the region starting to lower their policy rates, speculation is rife that Bank Negara Malaysia (BNM) may follow suit. MARC respectfully disagrees with the above view. While we acknowledge that GDP growth may taper off in 1H2013, we are of the opinion that it is not sufficient to induce policy makers to consider lowering the policy rate. We are also mindful of the manufacturing sector's present level of capacity utilisation (CAPU), which has remained relatively elevated since the economy recovered from the recession in 2009. With all these considerations, we maintain our base line scenario of the Overnight Policy Rate (OPR) at 3% for 2013.
The ringgit has gone through a relatively volatile period. With Malaysia’s economic growth expected to moderate in 2013 and the fact that foreign shareholding of government bonds remains high, there is an increasing possibility of higher capital outflows in the near term. This will likely cap any upside of the ringgit in the next six months. As such, we now view the ringgit to trade against the greenback between RM3.05 – RM3.25 for the rest of the year.
For a copy of MARC’s 2H2013 Economic Outlook, please click here.