The State of the Nation: Another quarter of strong GDP growth reveals further divergence from on-the-ground sentiment

GIVEN Malaysia’s robust economic performance in the first half of the year — boosted by a better-than-expected gross domestic product (GDP) growth of 5.8% in the second quarter — the full-year reading is likely to surpass Bank Negara Malaysia’s target of 4.3% to 4.8%. However, there seems to be a disconnect between the economic data and what ordinary people are experiencing in real life, something which Bank Negara governor Datuk Muhammad Ibrahim acknowledges.

During his media briefing last Friday on the country’s economic performance in the second quarter of the year (2Q2017), Muhammad said GDP growth this year is going to be higher than the 4.8% projected, judging from data in the first half of the year and barring any external risk.

“Based on the numbers in 1Q2017 and 2Q2017, we expect growth to go beyond our forecast of 4.8%, but the new number will be announced by the Ministry of Finance during the Budget 2018 presentation in October, about two months from now, so we are also working with them to come up with the new number,” he said.

When contacted, Affin Hwang Investment Bank Bhd chief economist Alan Tan, who forecasts Malaysia’s full-year GDP to be 5.2% this year, expects the economy to moderate in 2H2017 as domestic demand slows. However, he expects the growth momentum to continue.

“The domestic demand growth momentum for 2H2017 will continue, just that it will be slower because of the base effect. This will be offset by a decent increase in tourist arrivals … expected to pick up this month because of the SEA Games,” he tells The Edge over the phone.

The economy expanded 5.8% year on year in 2Q2017 — the fastest in two years since 1Q2015 — driven by higher private consumption growth, which accelerated to 7.1% in 2Q2017. Coupled with the 5.6% expansion in 1Q2017, GDP growth came in at 5.7% in 1H2017.

Muhammad said GDP expansion in 2Q2017 was supported by growth in employment conditions and higher private sector wage growth, which rose 7.1%.

Sectoral-wise, construction was the fastest-growing sector, expanding 8.3% y-o-y in 2Q2017, followed by services (6.3%), manufacturing (6%), agriculture (5.9%) and mining (0.2%).

“For domestic consumption and export, we expect it to improve further in 2H2017; the trend that we obtained from 1Q2017 and 2Q2017 seems to be sustainable. But there are always risks relating to external factors, but barring that, we expect it to improve or sustain,” said Muhammad.

While economic data shows that the private sector was spending in 2Q2017, the sentiment on the ground tells a different story, he said. “Somehow Malaysians have the tendency to be pessimistic, even it is not supported by their actions. The consumption numbers were very good, people were spending in 2Q2017, but the survey shows that they are not happy. So, there is a disconnect between the numbers and the sentiment.”

A survey by the Malaysian Institute of Economic Research (MIER) shows that while its Consumer Sentiments Index remains below the optimistic threshold of 100, it rose in 2Q2017 to 80.7 points from 76.6 points in 1Q2017.

The index fell to 69.8 points back in 4Q2016.

Nevertheless, Affin Hwang’s Tan says he does not see any “disconnect” as MIER’s survey shows quarter-on-quarter improvement.

“The sentiment is improving and private consumption is supported by government policies like BR1M and the reduction of contributions to the EPF (Employees Provident Fund),” he says.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie has a similar view. He says despite coping with a high cost of living and increased prices, growth in consumer spending was stronger than 1Q2017’s 6.6%.

“[This was] lifted by festive demand spending, improved rural income, cash handouts and the special RM1 billion Aidilfitri aid to 2.37 million civil servants and pensioners,” he says.

In a note last Friday, United Overseas Bank (M) Bhd economist Julia Goh says the divergence between the GDP numbers and sentiment on the ground is possibly because sectors that have garnered more strength in 2Q2017 have higher foreign direct investment (FDI) exposure such as oil and gas, manufacturing, construction, information and communication, finance and insurance.

“Malaysia’s compelling GDP growth of 5.7% in 1H2017 outpaced the regional trend as exports outperformed and domestic engines of growth ran further,” she says.

“However, the strong headline figures come in contrast to feedback [we hear] from the ground that growth is not widely felt.”

She points out that sectors like wholesale and retail trade, which employ over 16% of the workforce, recorded a decline in net FDIs in 1Q2017.

SERC’s Lee also says the surprisingly strong headline GDP numbers for two consecutive quarters have masked some disillusionment.

“The general sentiment surrounding the people remains one of cynicism and indifference. There remains a disconnect between the strong GDP growth and the reality on the ground,” he says.

“There are mixed reactions to the numbers, not so upbeat as they are not feeling the impact of strong economic growth. The sense we get is that the feel-good factors and strong economic growth did not trickled down to the average Joe as moderate salary increments were offset by the rising cost of living and increased prices of necessities.”

He says Malaysia’s relatively low wages also contributed to the limited impact on the ground. Nonetheless, he expects economic growth to persist, driven by firming domestic demand and exports.

“We are prompted to nudge up our 2017 projection to 5.5% from 5%,” he says.

Goh, on the other hand, maintains her full-year GDP growth of 5.2% for 2017, which implies a moderation to 4.7% in 2H2017.

“The resilience of the domestic sector is encouraging, considering the domestic inflation pressures and supply-side issues with regard to foreign labour,” she says.

AllianceDBS Research economist Manokaran Mottain, whose 2017 GDP forecast is 5.2%, says the economy is not overheating and, hence, Bank Negara is unlikely to be pressured to increase interest rates.

“For 2H2017, the economy may slow down a bit, but inflation will still be there. It is just normalising; the economy is not overheating,” he says when contacted.

Earlier on Friday, Muhammad said Bank Negara is expecting headline inflation to hover around 3% to 4% this year, depending on oil prices.

“We expect inflation to be between 3% and 4%, including the early part of the year, when it was slightly higher because of the oil prices. But as we move forward, we expect the oil prices to maintain at this level or maybe decline slightly. If the oil prices go up, then inflation will likely follow, but we do not expect that,” he said.

Lee points out that there are risks that require policymakers to monitor closely and remain alert, such as the anticipated tighter monetary stance from the US Federal Reserve, unpredictable geopolitical risks and rising threat of trade protectionism by advanced economies against emerging economies.

“On the domestic front, cost-induced price pressure remains. Strong consumption supported by higher wage growth must be monitored to keep a lid on demand-induced price inflation,” he says.

CIMB Research economist Michelle Chia, in her research note last Friday, cautions that Malaysia’s external position remains exposed to volatile capital flows.

“Malaysia’s external position remains exposed to the volatility of portfolio flows, which are susceptible to turning on a dime when market sentiment weakens,” she says.

However, Muhammad said he is unfazed by such concerns. He added that the net inflow in 2Q2017 shows that foreign interest has made a comeback to Malaysia’s market.

It is worth noting that in 2Q2017, Bank Negara’s financial account registered a net inflow of RM7.3 billion, versus a net outflow of RM8.8 billion in 1Q2017.

“Fortunately, for the last decade, we have developed our foreign market to have a diversified layer of investors. So when there is a sudden outflow of funds, the market mechanism will be able to intermediate it,” he said.


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