We anticipate global economy to grow a tad lower by +3.6% YoY (2018e: +3.7% YoY), slightly lower than IMF projection of +3.7% YoY. Closer to home, we forecast Malaysia to grow at a slightly more modest pace of +4.6% YoY (2018e: +4.7% YoY) as private spending moderates amid continued repriotisation of public expenditure. While commodity sectors are anticipated to rebound in 2019, there remains downside risk should there be prolonged production constraints. We anticipate inflation to trend higher in 2019 due to policy measures and base effect. Despite higher inflation, we expect BNM to maintain the OPR at 3.25% due to slower GDP and volatile capital flows.

Slower global GDP. We expect the world economy to grow a tad lower by +3.6% YoY (2018: +3.7% YoY), below the long-term average growth of +3.9% YoY.

Advanced economies expected to moderate in a synchronised fashion. US is expected to record a moderation as the impact of tax stimulus fades while higher borrowing cost start to slow domestic demand. Eurozone and Japan are also anticipated to record slower growth as external demand becomes more moderate.

Gradual monetary policy normalisation in 2019. With unemployment levels recovering to pre-crisis levels alongside lower threat of deflation, we expect the Fed to raise the policy rate 2x in 2019, slower than the pace projected by the FOMC. On the balance sheet, with the Fed reducing the size of the balance sheet and ECB stopping its bond purchase in 2019, global liquidity conditions is expected to contract further.

Slower emerging market economies. China is expected to grow at a slower pace (+6.4% YoY; 2018e: +6.6% YoY) with continued policy fine-tuning to provide some cushion against earlier focus on deleveraging efforts and slower external demand.

Malaysia GDP to be slightly lower. Closer to home, we expect Malaysia to grow at a slower pace of +4.6% YoY (2018e: +4.7% YoY), as private consumption and investment moderate in line with slower external environment amid continued repriotisation of public expenditure. Private consumption is anticipated to grow at a slower pace (+6.5% YoY; 2018e: +8.0% YoY) as the temporary tax holiday in 2018 front-loaded consumption activity.

On the supply side, the primary sector (agriculture and mining) is anticipated to see a marginal rebound as production constraints eases. However, downside risks remain should there be prolonged disruption in commodity production.

Current account to be slightly higher. CA surplus is expected to be slightly higher at RM30bn (2.0% of GDP) on account of stabilisation of commodity prices, normalisation in commodity exports and lower lumpy capital imports.

Risk to government’s fiscal target. While there are risk to government achieving the fiscal deficit target of -3.4% of GDP in 2019 due to volatile oil prices, there may be some offsetting impact from lower petrol subsidy bill from lower petrol prices. In addition, MOF’s 2019 budget projection does not take into account all the new tax measures that were announced during Budget 2019, which could also help to cushion the fall in oil-related revenue.

Higher inflation in 2019. We expect inflation to trend higher to 2.3% YoY (2018e: +1.3% YoY), driven by removal of blanket petrol subsidy, low base effect and spillover effects of SST 2.0.

BNM to stand pat. We see BNM standing pat throughout 2019 given expectations of slower growth, higher inflation amid volatile capital flows.

Source: Hong Leong Investment Bank Research - 4 Dec 2018