IN its 2018 annual report, Bank Negara has been realistic of the global uncertainties, as it has revised its forecasts lower as compared to the previous Treasury’s projection (gross domestic product: +4.9%) to a range of 4.3% to 4.8%in 2019. Slowdown is imminent in investment flows, external demand and growth in major industrial nations.

In China, we see further slowdown in view of the trade conflicts with the United States and structural policy reforms. Boom in debt over recent years, increasing unsold housing stock and corporate deleveraging continue to weigh on China’s economic growth. In the event that China is unable to engineer a soft-landing, this will result in a severe downturn in global commodity prices.

Slowdown in China may impact Malaysia more, given that the strong trade linkage and the pullback in global commodity market. This will lead to strong ringgit depreciation in addition to putting a cap in the prices of our key commodity exports such as crude petroleum, crude palm oil and rubber.

Nevertheless, if US president Donald Trump were to go ahead with a no-deal and proceed with his initial planned hike on tariffs, this will likely drag the global economy into a severe recession.

In the long run, trade war would have significant effect on GDP, manufacturing, employment and trade in both the United States and China. Due to negative spillovers, Malaysia’s trade volume could also fall significantly if global trade volume and value fall drastically.

Given the challenges in the global economy, we reckon the domestic economy may likely to slow down to 4.5% in 2019, with a downward bias. In our opinion, domestic demand could provide some support from improving private sector activity, following the new government’s reformations in both monetary and fiscal reforms.

The implementation of several government measures, particularly aimed at alleviating rising cost of living, is expected to boost consumption spending, especially by the B40 income households.

On the other hand, private investment activity could pick up if the government announces decision on certain infrastructural projects that had been stopped post the 14th general election.

However, public sector expenditure is not expected to lend a helping hand to growth, as the government’s commitment on prudent spending continues.

Lack of follow-through of new projects after the completion of large-scale infrastructure projects may also weigh down the growth momentum for the year.

The external sector is expected to perform modestly this year, given that global uncertainties have yet to subside. We expect exports growth to expand between 3.0% and 4.0% this year, underpinned by resilient demand in our E&E manufactured goods.

Inflation-wise, prices are expected to remain subdued due to weakened demand-pull pressures and the implementation of certain policies such as price ceiling of pump prices.

However, the transport sector will likely rise again if the implementation of targeted subsidies were to go ahead this year.

We reckon that the price ceiling of pump prices will only be applicable to the targeted subsidised group, while other consumers will revert back to the weekly floating mechanism according to the global crude oil price levels.

Being an open economy, Malaysia will still be subjected to several downside risks such as the outcome of on-going trade negotiations between the United States and China, delaying of Brexit, geopolitical tensions and slowdown in China’s economy.

Manokaran Mottain is chief economist at Alliance Bank Malaysia Bhd.

Source: https://www.thestar.com.my/business/business-news/2019/03/28/domestic-demand-likely-to-support-economy/#A6udfUXIGfI7jpq3.99