SERC cautiously optimistic on economy despite GDP forecast upgrade

KUALA LUMPUR: The Socio-Economic Research Centre (SERC) expects no more surprise jumps in gross domestic product (GDP) growth for the second half of the year, but projects that it will settle at 5% growth for the full year.
Its executive director, Lee Heng Guie, said SERC has revised its forecast from 4.3% to 5% on the back of the 5.6% growth achieved in the first quarter of this year owing to stronger exports and sturdier domestic demand. Its revision, however, is guided by a more moderate growth expected for the second half of the year.
“Potentially it can be above 5% but that depends on the momentum of exports, investments and private consumption,” Lee said.
SERC foresee’s GDP growth for the second half to be within the 4.7% and 4.8% range as it expects the aforementioned base effects, which are also growth drivers, to slightly dissipate.
The local currency on the other hand is expected to appreciate slightly to about RM4.20 and RM4.30 against the greenback, supported by Bank Negara Malaysia’s (BNM) stabilisation measures and temporary softening of the US dollar.
Nonetheless, going forward, Lee said the headwinds to weather for Malaysia will be predominantly from outside the country, namely the US Federal Reserve’s moves on interest rates and inward looking policies of advanced economies.
“The flip side from there is if the inflation in US is out of control, then the Fed will raise more, then we will have volatility in the financial markets,” he said.
On the domestic front, Lee said the main challenge is the need to strengthen consumer confidence to boost private consumption.
SERC foresees private consumption levels to inch slightly higher to 6.2% from the 6% recorded last year.
On the decline of the Nikkei Malaysia Manufacturing Purchasing Manager’s Index (PMI), which fell to 46.9 in June from 48.7 in May, due to dips in output and new orders, Lim said their experience is that the reading, which is not an official one, does not have an established reliable prediction of the Industrial Production Index (IPI) direction.
“You cannot discharge that because the PMI reading is below 50 for two months. Going forward our IPI reading will also be going on a downward trend,” he explained.
Inflation levels, which peaked in March, are expected to be subdued towards the end of the year, depending on crude oil prices. It is expected to go up to 4% if crude oil price remains around US$50 (RM215) per barrel.
While SERC does not expect BNM to raise the overnight policy rate (OPR) this year, it said a slight increase is likely next year.
Recently, Nomura said the likelihood of the central bank raising the OPR will depend on the build-up in debt levels.
It revised the GDP growth target to 5.3% from an average of 4%, on the back of stronger exports, muted protectionism policy of US President Donald Trump, spillover effects from the decline in unemployment that in turn spurred private consumption and the toning down of inflation, which peaked in March.
Nomura expects the local note to slightly appreciate to RM4.32 against the US dollar in 2017, before strengthening to RM4.26 at the end of 2018, despite a possible Fed rate hike in sight.