Markets
Looming concerns over economic growth
Stephanie Jacob 
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How the economic landscape in the second half of this year will develop or which direction the capital markets and growth are heading remains anyone’s guesses.

So far, there had been some bright spots in the first three months of the year to buoy confidence levels – and drive early optimism – but there is a question mark with regards to their ability to sustain over the rest of this year.

Moreover, there are also some nascent emerging risks that should make investors feel some disquiet, according to Standard Chartered’s (StanChart)(Singapore branch) global chief economist David Mann.

The fact that global growth has improved despite rising tail risks is not an indication that investors should be resting on their laurels for now.

Mann points to increasing US disengagement in the world, less supportive major central banks and over-leverage economies as headwinds to global growth.

US President Donald Trump’s recent decision to impose tariffs on US$60 bil (RM231.6 bil) of imports on China has shown his determination to push his populist agenda. The latter has responded by also imposing some tariffs but at a fairly measured pace.

Should the tit-for-tat escalate into a full blown trade war, it could ultimately trigger market panic. This in turn would be a blow to positive sentiment, says Mann.

Another factor to monitor in the coming months would be actions of major central banks. In Mann’s observation, most are becoming less supportive, hence a big risk factor this year would be the abrupt easing by the banks.

Particularly in focus should be the European Central Bank’s (ECB) quantitative easing moves.

“We now expect the ECB to slow its asset purchases to €10-15 bil per month by October,” he projected. “This is less aggressive than we projected in late 2017, but reflects the tightening of monetary conditions in the euro area since then.”

Malaysia’s economic prospects
Mann added that as funding costs rise, economies with excessive leverage may become more sensitive. He highlighted China, Hong Kong and Malaysia as Asian economies that trigger the most concern.

“We do not expect funding cost rises in these economies to be excessively burdensome, but any economy with stretched leverage is vulnerable to a sudden shock,” he argues.

Despite these concerns, StanChart expects growth to moderate but to be “a still firm 5.3% in 2018”, according to its chief economist (Asean and South Asia) Edward Lee.

Lee foresees high leverage holding growth back slightly this year, but added that the expected moderation is “not worrying” given the last year’s high base and growth levels which remain high.

“At 5.3%, [Malaysia’s] GDP growth would still beat the 10-year average of 4.7%,” he justified. On March 28, Bank Negara Malaysia raised its official GDP growth forecast to between 5.5-6% for this year from its initial forecast of 5-5.5% made back in October.

However, the central bank highlighted several potential risks to achieving its growth outlook. This includes rising trade protectionism which would affect world trade.

Markets reacting adversely to major monetary policy shifts in key economists and volatility stemming from large swings in the financial and commodity markets are also potential hiccups.

Locally, the on-going oversupply of non-residential properties also remains a concern for the central bank.

Dwindling consumer spending
Despite Bank Negara’s guidance, Maybank IB Research has retained its GDP growth forecast at 5.3% pending the release of the first quarter (Q1) GDP numbers, noted a report penned by chief economist Suhaimi Ilias and his team.

With regards to consumer spending, the research house believes that this year will be “a year of two halves”.

“While we acknowledge the positive impact from the stable job market conditions underpinned by the low unemployment rate and income growth, as well as from the lower personal income tax cut ... we expect a moderation in consumer spending growth to 6.5% this year from 7%,” it noted.

This can be attributed to Bank Negara’s interest rate hike of 25 basis points in late January and the normalisation of Employees Provident Fund monthly contribution to 11% from 8% (which was implemented between March 2016 and December last year).

Furthermore, given most of the Budget 2018 goodies aimed at spurring consumer spending are being disbursed within the first half (H1), this implies diminishing consumer spending stimulus from H2FY18, according to Maybank IB Research.

StanChart also sees private consumption coming off its FY17 high which was the strongest in three years. That said, it still expects both domestic and external demand to remain supportive this year.

“The positive equity market should support the wealth effect,” argues Lee. “Employment growth has recovered from its 2016 lows, average wage growth looks stable, and lower headline inflation should support real wage growth in 2018.”

Elsewhere, while the managed slowdown in China might weigh on exports, Malaysia’s overall exports performance should prove sustainable.

On the currency front, StanChart is of the view that the ringgit remains the only undervalued currency in the region – albeit at a lessened level as in previous years.

“Given this undervaluation, we expect the central bank to focus less on rebuilding reserves for now. Moreover, fundamentals are strong, supported by improved commodity prices,” concluded Lee.

This article first appeared in Focus Malaysia Issue 279.