MARC expects that economic growth in 2013 will largely hinge on global economic momentum, which at this juncture is clouded by the prospects of recovery in the Euro region. Nevertheless, the US economy may surprise on the upside, with rising consumer confidence, a recovery in the housing market and an improving labour market. While Japan’s economy is likely to show continued weakness, China appears to have bottomed out in 3Q2012 and should underpin trade growth in ASEAN. Overall, we anticipate real exports to rebound mildly and expand by 4.0% in 2013.

On the domestic side, demand will likely stay resilient amidst rising contributions from private investment and private consumption. Private investment will continue to remain upbeat in view of the ongoing infrastructure as well as other mega projects to be undertaken by the government in the next few years, while private consumption will remain resilient.

MARC foresees that the monetary policy will remain unchanged in 2013 as inflation remains benign. However, there is a possible upward bias towards the end of the year if the US economy continues to cruise steadily. The ringgit is expected to benefit from capital inflows, especially with QE3 underway in the US, and should have a bias towards appreciation; however we foresee that forex markets will remain volatile, especially with a declining current account surplus. On the fiscal side, the government’s deficit target of 4.0% should not be difficult to achieve, particularly as revenue growth is likely to surprise on the upside.

Potential major imbalances that are of concern in the economy include domestic asset prices, as housing costs in select areas are increasing faster than incomes despite efforts by the government to increase housing supply and central bank’s efforts to rein in property speculation. Household balance sheets also remain strained at over 70% of GDP with the lower income group most at risk, while the structural decline in the current account surplus may put some future pressure on the ringgit.

Overall, taking into consideration domestic forces that may offset weaknesses in the external sector, we foresee another resilient growth performance in 2013 with GDP growing at a 5.3% pace.

For a copy of MARC’s Economic Outlook 2013 Report, please click here.