SERC projects flat GDP growth in first half of 2017

KUALA LUMPUR: Socio-Economic Research Centre (SERC), which is maintaining its 4.3% gross domestic product (GDP) growth forecast for Malaysia in 2017, is expecting a flat growth in the first half of the year due to uncertainties in consumer spending and the recovery momentum for exports.
“We expect Q1 GDP to be 4.4%, Q2 is also around that level and it’s very crucial to see where are we in the second half,” executive director Lee Heng Guie told a media briefing on “Quarterly Economy Tracker (Jan-Mar)” yesterday. SERC’s full-year projection is 4.3%, which is at the lower end of Bank Negara’s projection of 4.3% to 4.8%.
However, he sees upside bias for the GDP forecast if exports growth could persist and lend support to the economy, with disruptive trade flow being the major risk arising from the Trump policy.
SERC has revised exports growth forecast to 5% this year from 1.5% to 2% previously. Improved global demand, semiconductor sales and higher commodity prices are the three fundamental drivers for this.
An expected recovery in exports seems to be common theme with Standard Chartered Research also raising its 2017 GDP growth forecast to 4.1% from 3.8%, roughly in line with 2016’s 4.2% growth, on the same.
In its report titled “Global Focus – Q2 2017: Animal spirits rekindled”, the research house said despite the upward revision of its forecast, it believes that growth will remain subdued in 2017 as household consumption may ease relative to 2016.
Lee also highlighted that the market needs to monitor closely consumer spending, which is estimated to be lower at 5.7% versus the 6% projection by the central bank. Consumer spending is a major component in GDP with a 53% share.
While Lee sees inflation (which rose to an eight-year high of 4.5% in February) as a main concern over risk of demand-pull inflation, he believes it is unlikely to happen unless the country registers a higher wage growth, which has a dampener effect on the living cost.
“What we see is only cost-induced inflation, we’re not seeing second-round demand-pull inflation effect. If you look at wage increment, it’s expected to increase about 5.4% this year. They are not asking for high increment as they knew the economy is not that strong,” he explained.
Inflation is expected to increase 3% to 4% in 2017, with an average rise of 4% to 4.2% in the first half before moderating to 3% to 3.5% in the second half.
Nonetheless, Lee said if there is a second-round demand-pull inflation effect, then there will be a need for Bank Negara to reassess the monetary policy to consider an interest rate to combat the inflation expectation.
At the moment, SERC expects the central bank to leave the Overnight Policy Rate unchanged at 3% this year.
While Malaysia recorded a 3.2% wage growth in December 2016, Standard Chartered Research said the strong rise in inflation may lead to lower real wage growth in 2017 compared with 2016.
On fiscal deficit, Lee is optimistic that Malaysia will be able to achieve the 3% fiscal deficit to GDP target this year, if oil prices continue to stay at the current level of about US$55 a barrel.
Year to date, crude oil prices have averaged at around US$53 a barrel. For every US$1 (RM4.43) increase in oil prices, it could generate RM300 million in revenue for the government.

“We hope that the government can cut down the wastage and leakages, then we can see a firmer budget consolidation along the way.”
“At this moment, to achieve a balanced budget by 2020 is a tall order because fiscal budget reduction over the last two years has been quite small and there are a lot of committed expenditure that the government needs to allocate,” he added.
Meanwhile, Lee expects the ringgit to trade around RM4.30 to RM4.40 against US dollar by the end of the year following Bank Negara’s stabilising measures.