Malaysia’s domestic demand is expected to cushion against challenges of moderate export growth amid increased trade protectionism and slower Chinese import demand, according to ICAEW’s latest Economic Insight: South-East Asia report.
Malaysia’s gross domestic product (GDP) is expected to grow at 4.4 percent in 2019 on the back of domestic demand, amidst a difficult export environment. Exports are expected to remain under pressure, with the increase in trade protectionism over the past year unlikely to change any time soon.
Economies in the South-East Asian region started the year on a soft note, as a result of the weakness in global economic activity late 2018. Malaysia was the only country to record positive annual growth for exports, as regional figures tumbled in December 2018; contracting 2.3 percent on the year following a weak outcome (2.2 percent) in November. Data indicates further weakness ahead in the manufacturing and export sectors as Malaysia’s aggregate Purchasing Managers’ Index (PMI) slipped into contractionary territory.
Domestic demand will likely provide some relief. However, there are pockets of concern with regards to investment growth. Private capex especially in machinery and equipment (M&E) investment, has been on a downward trend in Malaysia in light of notably slower export growth. Residential investment will also expected to be held back by demand and supply imbalances but construction, particularly infrastructure investment, is expected to limit the downside to overall investment. Benign inflation conditions and rising real income growth will also continue to support household spending.
“Looking ahead, we expect the risks to the economic outlook of Malaysia to be primarily to the downside. A sharper slowdown in Chinese economic growth, triggered by worsening confidence or a renewed escalation in US-China trade tensions, both affect global trade and growth across the region,” said Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist.
“That said, we do not expect the external environment to be as worrisome as it was in 2015/16, as China’s growth is also expected to stabilise in second quarter (Q2).”
Looking at economies in South-East Asia, domestic demand will likely provide some relief, together with accommodative macro policies. Most central banks are likely to keep policy rates unchanged well into the second half of 2019 amid muted inflationary pressures. Expansionary fiscal policy will also help, with fiscal spending expected to be strong in Indonesia, Thailand and the Philippines ahead of upcoming elections in first half (H1) 2019.
Mark Billington, ICAEW Regional Director, South-East Asia, said, “Although we expect domestic demand to remain resilient, the impact of increased trade tensions in the past year and slower Chinese import demand is likely to act as a drag on the region’s growth as a whole. The outlook for Asia trade may continue to face a challenging export environment.”
Other findings in the report include:
- Indonesia’s GDP growth to slow to 5 per cent in 2019 despite expansionary fiscal spending
GDP growth rose in fourth quarter 2018 5.2 percent year-on-year, unchanged from the previous quarter and bringing full year growth to 5.2 percent, up slightly from 5.1 percent in 2017. As anticipated, domestic demand remained the key engine of growth in the quarter although the data was mixed. Consumer spending picked-up slightly, growing 5.1 percent year-on-year, aided by mild inflation and a healthy labour market. However, growth in government spending and investment decelerated amid efforts to lower expenditure and a paring down in the pace of infrastructure investment.
Looking ahead, modestly higher inflation and lower planned increases to minimum wages in 2019 are likely to dampen real household income growth and consumption growth, offsetting the impact of pre-election giveaways in the 2018 Budget. The outlook for exports remains challenging amid cooling Chinese import demand, import growth is likely to continue to slow this year and net exports is expected to place less of a headwind on growth in 2019.
Overall, Indonesia’s GDP growth is likely to moderate to five percent in 2019, from 5.2 percent in 2018.
Singapore’s GDP to grow by 2.4 percent in 2019, weighed by external headwinds
In Singapore, the mildly expansionary budget will support growth into the year to come, albeit with no significant impact on household spending. The outlook for the country’s manufacturing and services sectors remains muted with the slowdown in global trade expected to affect both the manufacturing and external dependent serviced sectors this year. Singapore is undeniably very exposed to China via supply chain linkages and directly through meeting China’s domestic demand.
In addition, momentum in household spending is expected to slow from the strong gains in 2018 as higher domestic interest rates and negative wealth effects (associated with the fall in equity prices in 2018) will dampen growth in households’ spending power. Residential investment is expected to remain sluggish and the challenges facing business investment have increased. The recent fall in commodity prices is likely to weigh on investment in the oil and gas sectors. Despite the recent truce in the US-China trade war, trade protectionism will likely increasingly affect private sentiment and investment intentions, with momentum in corporate profits also forecast to soften.
Overall, against a more challenging environment for exports and the manufacturing sector Singapore’s GDP is forecast to grow by 2.4 percent in 2019 from 3.2 percent in 2018.
The full Economic Insight: South-East Asia report is available at: http://www.icaew.com/en/technical/economy/economic-insight/economic-insight-south-east-asia