Gloom in global economy puts a damper on Malaysia’s growth reading

WITH the European and US economies looking fragile, there is a great deal of uncertainty over how global economies will fare for the second half of this year. With that, pundits wonder if Malaysia's forecast 5% to 6% growth for the year is achievable.

Several foreign economists have downgraded their full year gross domestic product (GDP) growth forecasts for Malaysia on the back of lower second quarter economic growth and as global uncertainty threatens to affect overall global growth.

“We are in the middle of revisiting the numbers, based on the uncertain global outlook. It's very hard to read the tea leaves with ultra-strong conviction at this stage. There is still hope that 5%, the lower end of (Bank Negara's) official forecast range, might be achievable, with the caveat that global growth may slow down but not a double-dip,” Hongkong and Shanghai Banking Corp Ltd Asian economist Wellian Wiranto told StarBizWeek last Wednesday.

He adds that part of the support for what is seen as a fairly respectable growth rate is domestic demand.

“At least in the immediate months, private consumption should stay relatively buoyant while investments may play a lifting role. Whether these will more than make up for any loss of exports depends on just how much slower exports will turn out to be,” Wiranto says.

Should uncertainty in global markets be prolonged, domestic sentiment will be hit, and that will translate to a slower whirr in the country's growth engine, as consumers will potentially put off big-ticket purchases and firms adopt a wait-and-see attitude for long-term investments, he adds.

Meanwhile, OCBC Research has revised down its 2011 GDP forecast for Malaysia, from 5.8% to 4.9% year-on-year (yoy), after taking into account the material slowdown seen in global growth momentum recently.

In a report out last month, OCBC economist Gundy Cahyadi said the Government's 5% GDP target for this year was questionable given the 4% expansion seen in the second quarter. First quarter growth was 4.9%.

“The moderation in growth is hardly a surprise, noting the broadly disappointing export growth data in the second quarter and the fact that second quarter GDP data out of the region has come in short of market expectations except for the domestically-driven Indonesia. As we have noted previously, the sharper-than-expected slowdown in export growth has its spillover effects on the domestic economy, and this partly explains the drop in domestic consumption growth from 7.1% yoy in first quarter to 5.9% yoy in second quarter,” Cahyadi adds.

While commodity export earnings has also declined, concerns over a slower global growth momentum in the second half of this year coupled with a slight uptrend in domestic inflation might have caused consumer sentiment to fall off its recent high at the start of the year.

But a key catalyst to Malaysia's overall growth remains in its investment growth.

“To some extent, the moderation in public spending from 8.9% yoy to a mere 4% yoy in the second quarter might be behind the fall in investment growth, as private investors might have taken the cue from the Government to put their brakes on new investment projects, especially amid the bleaker global growth story. That said, we continue to expect a strong underlying support from the Government's public initiatives to sustain a modest expansion in private investment locally,” it adds.

The bulk of the risks going forward still stems from the state of global demand a stagnant palm oil price and a somewhat lower oil price do not bode too well for Malaysia's export growth picture in the second half of 2011.

“It should be noted that while Malaysia has seen a sharp recovery in commodity exports during the fourth quarter of last year to the first half of this year, volumes of both oil & gas and palm oil exports have remained relatively flat, suggesting that commodity prices have played a larger role in boosting the export figures,” says Cahyadi.

Credit Suisse research analyst Wu Kun Lung expects an increase in government spending, along with investments from the Economic Transformation Plan (ETP) and a recovery in mining production, to help support growth in the second half and cushion any external slowdown.

“However, this will not be enough to offset the weakness in exports. We recently cut our GDP growth forecast for 2011 to 4.6% from 5.3%,” Wu says in a report out earlier this month.

Wu adds that the Government underspent considerably in the first half of this year, while revenues were higher than budgeted. The central Government's fiscal deficit of RM4.5bil for the first half was only about 10% of the deficit budgeted for this year, with the underspending mainly coming from development expenditure.