Published on 14 Feb 2019.
After a year fraught with extraordinary developments and myriad uncertainties, both at home and abroad, Malaysia’s GDP growth clocked in at a resilient 4.7% in 2018, in line with RAM’s projections. This was largely driven by resilient exports and a surge in private consumption during the tax-free holiday, between the cessation of the Goods and Services Tax (GST) and the reintroduction of the Sales and Services Tax (SST) last September. 1 Moving forward, we expect economic growth to moderate slightly to 4.6% in 2019, premised on slower exports and investment activities. That said, a worse-than-anticipated decline in external demand and volatile financial markets amid the US-China trade dispute as well as a potential no-deal Brexit remain significant downside risks to our forecast.
Despite escalating US-China trade tensions, much of the sturdy 1.5% export growth in 2018 is attributable to front-loaded demand ahead of the several rounds of tariffs imposed by both sides. This was mainly driven by firms’ attempts to avoid higher production costs stemming from increased tariffs, coupled with the lag in recalibrating global supply chains. “This surge in demand resulting from knee-jerk reactions to rising protectionism is not envisaged to keep propping up growth for very much longer,” observes Kristina Fong, RAM’s head of research. The overall business sentiment of export-oriented firms covered by the RAM Business Confidence Index (BCI) has been trending downwards, signalling increasing caution amid the US-China trade war.
Closer to home, the construction sector is seen to continue weighing down overall expansion in 2019, premised on the absence of new growth catalysts amid the persistent property overhang and the shelving of big-ticket infrastructure projects. As expected, weaker sentiment is also discernible among retailers, amid the dissipating effects of strong retail sales arising from the earlier tax-free boost, especially for discretionary goods such as cars.
The most significant downside risk will stem from lingering economic uncertainties impinging on business sentiment, with the power to adversely sway both external and domestic-oriented business decisions. Capacity-building activities such as investment and hiring intentions are also noticeably weaker across the board according to the latest RAM BCI for 1Q-2Q 2019 indicating that moderating demand prospects have already begun influencing firms’ business plans. Although opportunities may be gleaned from positive trade-diversion effects further down the line, lingering global uncertainties courtesy of unclear foreign policies will underpin the outlook on 2019.
1 The new Pakatan Harapan administration zero-rised and abolished the GST system in June 2018, following their election victory in May. This had been one of their key election promises.
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