MiER Announces 3Q2017: Good, But Not Too Good (continuation)

Even though the first half of the 3Q2017 economic outlook report turned out to reach above expectations, not all is well. Although in most aspects, the economy is looking positive, but there are still some areas that needs to be kept under close watch.

MiER’s Business Conditions Index (BCI) for 3Q2017 shows that businesses are optimistic about the near-term prospect as well as on the export demand. The better-than-expected growth in the first half of 2017 exerts positive sentiments, reflected by several indicators.

Among others, the domestic financial market recorded positive inflows of portfolio investment amounting to RM16.0bn for 2Q2017. The portfolio inflows also resulted from measures to develop the domestic financial market. Given the development in the financial market and good macroeconomic indicators, Ringgit rallied strongly against the USD during the first nine months of 2017, where Ringgit has appreciated by 6.3% against the USD.

Notwithstanding the above-expectation economic performance of the 1H2017, consumer confidence remains weak as MiER’s 3Q Consumer Sentiments Index (CSI) continues to be below the demarcation level of 100 points. Nonetheless, consumers remain optimistic about the economy since the index is still above the 4Q2016’s index. Consumers also appear to be optimistic about the employment outlook for 3Q2017.

Crude oil prices increased moderately this year, after hitting the lowest in 1Q2017. The accord made by the Organisation of the Petroleum Exporting Countries (OPEC) to cut oil outputs and combat the global supply glut, witnessed more favourable prices in 2017. The compliance rate on the agreed quotas among OPEC members was quite high in 1Q2017. Total world production began to upsurge when OPEC’s production rose 6.5% above the quota, contributed by the two member countries exempted from the quota (Nigeria and Libya).

OPEC production continues to rise and concurrently the non-OPEC productions are also rising, which will exert a downward pressure on prices. Crude oil prices are expected to average out at US$55 per barrel in 2017 and will further improve to US$60 per barrel in 2018.

As for the agriculture commodity, crude palm oil (CPO) started with better prices earlier this year due to stronger demand and weather-related supply disruption last year. However, better harvest this year saw production on the rise and simultaneously, prices are sliding down. Not only that, the imposition of tariff on edible oils by India worsen the outlook for the industry.

What this means…

Taking into consideration the current development in the world economy as well as on the domestic front, the Malaysian economy is projected to grow at 5.4% this year, which is an upward revision by 0.6 percentage points from MiER’s July forecast. The growth is expected to primarily be driven by domestic demand and reinforced by stronger external demand. Domestic demand is expected to grow by 4.8%, which is also an upward revision from July’s forecast, by 0.2 percentage points.

Private consumption is expected to grow faster at 6.1% (0.1 percentage point upward revision), while the growth projection for public consumption maintains at 1.0%, and gross fixed capital formation to grow by 3.9% (0.2 percentage point upward revision). The growth in exports of goods and services as well as the growth in imports for this year are also revised upwards to 13.4% and 13.6% respectively.

The growth projection for 2018 is maintained at a range of 4.7% to 5.3%, as of now. The current account balances for 2017 and 2018 maintains as per July forecast, which are estimated to be 1.8% and 1.6% of GNI respectively. Balances on good account for 2017 and 2018 are also maintained at 8.4% and 8.2%, respectively.

Despite all this, there will always be a number of risks that might alter the results of the forecast, including:

  • Unexpectedly aggressive monetary policy normalisation
  • Less expansionary than expected fiscal stimulus
  • Insufficient investment among larger emerging and low income economies impeding growth potentials
  • Larger than expected fiscal stimulus in major economies
  • Contagious effect on Brexit
  • The return of protectionism
  • Slower than expected slowdown in China and emerging economies weaken global demand
  • Unresponsive/less sensitive fiscal and monetary expansionary measures in major developed economies
  • Upward stickiness of oil prices slows down the recovery of oil-exporting countries
  • Slower than expected recovery in the advanced economies
  • Prolonged geopolitical conflicts
  • Prolong undervalued Ringgit
  • Rising of public and private debts
  • Unresponsive/less responsive fiscal and monetary expansionary policy

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