Mixed views on 2017 economic growth

KUALA LUMPUR: After a turbulent 2016, economists have mixed views on Malaysia’s economic growth for 2017, with gross domestic product (GDP) growth forecasts differing on whether the economy either performing better or worse than 2016.
RAM Ratings economist Kristina Fong expects the economy to see better growth of 4.5% this year against an estimated 4.2% last year, driven by better labour conditions, resilient domestic demand and wage growth.
“We also see upside in the trade indicators, which points to some stabilisation in the external demand,” she told reporters at a media briefing on the RAM Business Confidence Index yesterday.
However, Standard Chartered Bank head of Asean economic research Edward Lee is less optimistic with a slight cut in growth forecast to 3.8% from 4% previously.
“The slight moderation is mainly from the consumer side. I do see the softening in the labour market and of course the pick up in inflation side,” he told reporters at the bank’s Global Research Briefing 2017 yesterday.
Lee said he is cautious about the economic performance this year due to the pick up in unemployment rate and inflation, and slow down in employment growth, which are expected to eat into real wage growth and consumption.
Although consumption held up a lot better than expected last year, lending huge support to growth, Lee said consumer spending was partly due to one-off measures like the voluntary cut in EPF contribution and minimum wage hike.
“I think the wealth effect has been slowly easing off over the last one to two years for example, the property market. While it is still a positive year-on-year in terms of price increase, that increase has been slowing down. On consumption, I don’t think it is going to remain as strong but will still be a big contributor to growth,” he added.
He said consumption is likely to slow down towards the second half of 2017 (2H17), which leads to his expectation of a 25 bps interest rate cut in May.
“Looking at 2H17, we have a higher base in terms of consumption from 2H16. From that perspective, if labour market conditions continue to weaken for example, we are going to have a higher base and depending on other things, it may actually necessitate a rate cut,” he said.
However, he noted that his forecast of an interest rate cut could be delayed beyond May this year if interest rate volatility is too high.
RAM Ratings’ Fong however, expects the central bank to maintain the Overnight Policy Rate at 3% on the back of improving growth expectation and volatility in currency exchange rates.
“We think it is more optimal for the interest rate to stay at the current level,” she said.
On the currency front, she said the ringgit continues to be volatile, particularly in the first half of the year. The local currency is expected to average between 4.0 and 4.5 against the US dollar for 2017.
“The wider range does represent the external volatility that we expect for this year. It could hover above 4.5 during some time with increased volatility,” she opined.
Meanwhile, Standard Chartered Bank FX Strategist for Asean and South Asia Divya Devesh expects the ringgit to weaken to 4.6 against the greenback by June this year, before retracing to 4.3 early next year.
He said the ringgit can remain under pressure in 1H17 as it has become disconnected from fundamentals due to the deterioration in market liquidity and onshore corporate behaviour.
“Exporters have been reluctant to sell dollars for the past year or two. That has made onshore demand-supply extremely one-sided,” he said.
However, he does not expect the ringgit to weaken further than 4.6 as Malaysia’s fundamentals are still strong and valuations remain attractive.