GDP growth and inflation to recede in 2018

PETALING JAYA: Public Investment Bank Research (PublicInvest) expects gross domestic product (GDP) growth to recede to 5.2% in 2018 which in turn will also avert future incidence of spiralling inflation, after coming it at 5.9% in 2017.
Malaysia’s growth performance for 2017 which defied expectations of the research house and consensus, was attributable to stronger domestic demand, a trend which is seen as likely to remain resilient and will be the impetus for Malaysia to maintain a strong growth trajectory.
Reinforcing its projection for 2018, the research house opined that slower growth rate will give space for capacity building, which will prevent future incidence of spiralling inflation.
Inflation is expected to fall to 3.0% on the back of a stronger ringgit which will clamp the rise of imported inflation; interest rates hikes by the US Federal Reserve which will also curb the rise in commodity prices; as well the recent adjustment of the overnight policy rate (OPR) which will rein in demand to some extent, in turn capping demand-driven inflation.
PublicInvest projects that the local unit will see less volatility in 2018 and strengthen from the average of RM4.30 last year to RM4.00-4.10.
This will be supported by Bank Negara Malaysia (BNM) offshore trading policy, steady trade, positive current account surplus pushed by economic recovery and slowdown of negative political noise which will reverse the selling pressure on the ringgit. Malaysia’s resilient growth will also boost the appeal of the currency to investors.
“Note that ringgit is expected to slide once the oil prices dip especially during the summer season where demand for the precious commodity is likely to get slower. This will pull ringgit down as well, pushing ringgit to average towards our full year projection,” the research house added in a note today.
It also deemed that there is less likelihood for another hike to the OPR following the 25 basis points increase by Bank Negara on January 25 as a pre-emptive measure to prevent financial imbalance.
“The risks of OPR to get adjusted to 3.5% is quite small as Malaysia is predicted to grow within the range of 5% ++ in 2018. The last time Malaysia’s OPR reached the 3.5%-level was when the country’s growth rate reached above 6%. In sum, we expect the current OPR to stay at the current level throughout the year,” it noted.
Reviewing the growth numbers for 2017, the research house noted that domestic demand showed a strong growth rate touching 6.5% which was close to the last six years average of 6.7% while private investment jumped to the highest since 2012 to 9.3%, signalling strong capacity building on the back of positive sentiments and investment intentions.
Excluding net exports, full year growth rate could have hit 6.0%. Faster growth in imports (2017: 11.0%; 2016: 1.1%) weighed on net exports (2017: 1.1%; 2016:1.5%) which contributed -0.1% to growth in 2017 against 0.1% in 2016.
“ In short, Malaysia can rely on domestic demand to grow, with net exports used as added impetus especially when external conditions can be volatile and uncertain. More importantly, Malaysia has been able to reverse the slide in current account surplus-to-GDP. For 2017, it rose to 3.1% against 2.4% in 2016, reinforcing undervalued conditions of the ringgit,” PublicInvest explained.