Economic Outlook 1Q2013

Economic Outlook 1Q2013

A tough start for 2013

 

 

n  2012 economic overview. The economic performance has been surprisingly better in the first three quarters of the year, thanks largely to a more resilient services sector as well as the strong construction activity and its multiplier effect on the economy, courtesy of large infrastructure projects under the Economic Transformation Programme (ETP). However, due to a sharp drop in final demand from recession-hit Eurozone and slower growth in major and emerging economies, the economic growth for Malaysia is expected to decelerate as it approaches year-end. In 4Q12, we estimate real GDP growth to taper off to 4.3% after an average of 5.3% in the first nine months of 2012. For the whole of 2012, we maintain our GDP forecast of 5.0%

 

n  Two out of four ain’t bad. Comparing the four largest economic areas - the United States, the European Union (EU), Japan and China – two of them seem to be growing decently; and the remaining two is experiencing a rather mild recession. While the growth prospects of the U.S. economy seem rather mix, there is some promising signs of recovery in China. However, the spillover of the Eurozone’s double-dip experience and Japan’s technical recession would put a damper on growth in 1H2013.

 

n  A slow start for 2013. Apart from external factors, the uncertainty surrounding the yet-to-be-announced General Election (GE) would result in Malaysia’s economy to kick off the year to a slow start. Our initial projection for 1Q13 would see GDP growth to slow to 3.7% from an estimated 4.3% in 4Q12. Private sector spending is expected to gradually pick up pace as the year progresses, particularly in 2H13 as major ETP projects would be in full swing. Unless we see firmer growth trajectory in the U.S. and China in 2H13, along with an early-cycle expansion in euro zone and Japan, we do not have a strong reason to revise our GDP growth forecast of 4.7% for 2013.

 

n  Impact of Obama’s 2^nd term. We are rather concerned of Obama’s bent towards protectionism, as Malaysia is still keen to participate in the Trans-Pacific Partnership Agreement (TPPA) negotiations. If the trade agreement is lopsidedly favouring the U.S., it may not bode well for Malaysia’s exports over the long term.

 

n  Interest rate to stay pat. On the expectation of a gradual reduction of subsidies post GE and the low base effect, we project the headline CPI to increase slightly to 2.1% from an estimated 1.7% in 2012. Given that inflation is largely influenced by cost-push factors and the fact that the economy is expected to grow below its potential next year, there is a higher probability that BNM may adopt a more accommodative stance. If the economic condition of the four major economies deteriorates in 1Q13, BNM may likely cut the Overnight Policy Rate (OPR) by 25 bps to 2.75% in 1Q13.

 

n  Ringgit upside intact but limited against the dollar. Fundamentally we still believe that the Ringgit remains undervalued, partly because the greenback faces downward pressure as risk of fiscal cliff looms along with the value-dilution-impact of QE3 and the Fed’s additional bond purchase programme. Given that a relatively stronger Ringgit would adversely affect Malaysia’s trade competitiveness it would mean that BNM would have to be more vigilant to intervene and manage the currency. With the highly uncertain economic scenario in 1Q13, we predict that US$/RM would remain volatile with limited upside. Our end-1Q13 target is 3.03. The two-way volatility is expected to remain high for the rest of the year and it may breach the 3.00-mark. Having said that, our new year-end US$/RM target is 2.97 (3.01 previously).

 

n  Risk to growth and outlook beyond 2013. For now, the probability of a full blown fiscal cliff happening, a hard landing in China, or a deeper recession in the Euro zone or another acute deflation in Japan is relatively low. On a domestic front however, we are concerned on the outcome of the GE as a change in the Government would have an adverse impact on the capital market and the economy. Rising household debt may also raise a red flag on the structural risk of the financial system. But the fact that the economy is expected to grow below 6.0% for the third year in a row would definitely upset the target set by the ETP to achieve a developed economy by 2020. This would require major rethinking by the powers that be. Nonetheless, the momentum of the expected global growth recovery in 2H13 along with multiplier effect from the on-going ETP projects would spillover into 2014. Based on our preliminary projection, we could possibly see a higher growth between 5.5% to 6.0%.