Executive Summary

• We expect the world economy to grow a tad higher by 3.7% in 2018 (2017e: +3.6%), just slightly below 2000-2017 average of 3.8%.

• Prospects for the advanced economies have improved. In 2018, growth is expected to increase at a more moderate pace, driven mostly by domestic demand strength amid a stable external environment. Growth in emerging and developing economies is also anticipated to recover further riding on firmer commodity prices.

• Global inflation is anticipated to firm further in 2018, but remain moderate due to steady rise in commodity prices and deleveraging pressures in some major economies.

• Closer at home, we expect Malaysia to grow at a more moderate pace, but still decent at 5.3% in 2018 (2017e: +5.6%), driven by increased public expenditure amid steady private sector demand.

• Private consumption is expected to sustain its expansion pace at +6.8%, supported by improvement in labour market, stable consumer sentiment and higher net worth. 2018 Budget measures (special allowance, 2ppts income tax cut) will also provide further support to disposable income. Meanwhile, public sector expenditure is expected to expand at a faster pace on higher operational spending amid increased fiscal revenue.

• On the supply side, most sectors are expected to grow at more moderate pace as base effect kicks in, except for construction as infra activities regain momentum. Meanwhile, services will be driven by continued expansion in consumption and finance activities.

• Current account surplus will remain stable at RM25bn in 2018 (2017e: RM25bn) given firmer commodity prices and continued expansion in global trade activities.

• We are confident that fiscal deficit target of 2.8% of GDP is achievable supported by higher oil prices, targeted subsidies and stricter enforcement.

• We expect inflation to trend lower to 2.7% in 2018 (2017e: +3.8%) on the back of moderation in oil price recovery and expected ringgit appreciation.

• While we opine that BNM may normalise the interest rate by 25bps as early as May 2018, we do not see it as a beginning of a rate hike cycle. Spill over from export growth to domestic demand has not jeopardised growth stability while underlying inflation remains stable. There is also absence of financial instability concerns.

• MYR is expected to experience mild appreciation bias within RM4.00-4.20/US$ range in 2018 following support from more balanced flows. Sustained trade flows and normalised foreign equities and bond outflows are expected to limit the pressure on ringgit. A more synchronised recovery in global growth will also limit US$ strength.

Source: Hong Leong Investment Bank Research - 16 Nov 2017