GDP growth to moderate to 5.1% this year: SERC

KUALA LUMPUR: The Malaysian economy is expected to moderate to 5.1% this year due to the high base effect from 2017, the Socio-Economic Research Centre (SERC) projected, noting that the current pre-election sentiment on the local bourse is positive with the stronger ringgit boosting optimism.
SERC executive director Lee Heng Guie estimates that gross domestic product growth in 2017 will be between 5.8% and 6%, the strongest in two years.
He expects economic growth outlook for 2018 to be led by domestic demand, albeit at a slower pace. Lee said the strong double-digit export growth and export levels will normalise and grow at a slower pace (estimated 7.5% in 2018 compared with 19.8% projected in 2017) as the high base effect kicks in, and the waning effect of favourable exchange rate valuation due to the gradual strengthening of the ringgit.
“If there is no major pullback in consumer spending, we should be able to see a growth of 5.1%,” he told a media briefing on the quarterly economy tracker today, adding that there is upside potential to its forecast if export growth turns out to be stronger.
He also expects a 25bps rate hike by Bank Negara Malaysia (BNM) in its Monetary Policy Committee meeting next week.
“Our baseline call is 25bps for a start. The market must prepare for further rise in rates if (three) conditions are met throughout the year,” he said.
These conditions include global growth and domestic economy continuing to sustain at strong levels; the need to anchor inflation expectations should inflation continue to remain at elevated levels as oil prices remain a wild card; and balance yield gaps should the Fed hike rates aggressively.
Lee said Malaysia’s current economic condition is ready for a review of monetary policy and can absorb a small 25bps rate hike, which would bring it back to levels before the rate cut during Brexit.
“At the moment, export and consumer spending are growing, there’s no significant signs of pullback. A small step of 25bps will not discourage consumption and investments. If you keep rates at this level too long, eventually it will create risks, although we see an improvement in household debt,” said Lee.
On whether a rate hike may temper sentiments with the coming election, Lee said BNM will look at the total picture.
“I believe that the growth is strong, so they can go ahead (to raise rates). It’s a tough call, whether you want to take into account these sentiments or political (election), the central bank will know how best to move.”
At the moment, he said, foreigners are coming back to the local bourse in a big way in anticipation of the imminent election, specifically those who invest in stocks with an election-play, thanks to the stronger ringgit and a better economic outlook.
“At the moment, the sentiment is still positive. With the oil price firming up, it creates optimism. When Parliament dissolves, investors will turn sidelines and closer to election, they will be more careful to see the outcome,” said Lee.
Meanwhile, the impending general election could provide the ringgit with headwinds in the first half of the year, but good economic and financial fundamentals are expected to be supportive of the ringgit, which is fundamentally undervalued. Lee expects the ringgit to trade between RM3.80 and RM3.90 against the US dollar by end-2018.