Downside Risks to Global GDP Growth Remain in 2020

Bank Negara Malaysia (BNM) decided to cut its Overnight Policy Rate (OPR) by 25bps from 3.0% to 2.75%, after leaving it unchanged for three consecutive meetings since May 2019. This was its lowest level since April 2011. The ceiling and floor rate of the corridor of the OPR were also lowered to 3% and 2.5%, respectively. BNM guided that its decision to lower the OPR was a “preemptive measure to secure the improving growth trajectory amid price stability”.

In its latest assessment of the global economy, despite recent improvement in macro indicators and some easing of global trade tensions, which is reflected in the improvement in global trade activity, BNM cautioned that downside risks continue to persist, partly attributed to geopolitical tensions and policy uncertainties in a number of countries. This was also in line with International Monetary Fund’s (IMF) latest assessment on the global GDP outlook, in which it guided that the modest pickup in global growth in 2020 will hinge on further developments of the global trade war, as well as Brexit and economic ramifications of social unrest and geopolitical tensions. The IMF lowered its 2019 and 2020 growth projections by 0.1 percentage points to 2.9% and 3.3%, respectively.

As for the domestic economy, BNM anticipates the country’s economic growth in the fourth quarter of 2019 to be moderate as reflected in recent indicators and supply disruptions in commodity-related sectors. However, in 2020, BNM expects Malaysia’s GDP growth to improve bolstered by household spending and an improvement in export growth. Investment is also anticipated to turnaround albeit modestly supported by ongoing and new projects in the public and private sectors. However, BNM highlighted that downside risks to global and Malaysia’s economic growth remains, stemming from “uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects”. On the inflation front, BNM projects headline inflation to likely average slightly higher in 2020 (0.7% in 2019) but this will be dependent on global oil and commodity prices as well as the timing of the implementation of the fuel subsidy programme.

We are maintaining our real GDP growth of 4.7% estimated for 2019 and likely to remain commendable albeit slower at 4.5% projected for 2020. We believe some of the Budget 2020 announced measures as well as healthy labour market condition to be supportive of domestic demand, especially private consumption. However, the possible escalation in trade war uncertainties will remain as a downside risk. Following the signing of the ‘Phase one’ trade deal, there remains uncertainty surrounding the progression of trade talks, as a ‘Phase two’ deal may only occur in 2021 after the Presidential elections in November 2020, in our view. We believe this would also suggest no roll back in the earlier imposed 25% tariffs on the US$250bn worth of Chinese imports. We believe the latest OPR cut by BNM may be partly attributed to the recent coronavirus (2019-nCoV) outbreak amid increasing number of confirmed cases of infection. This may be a pre-emptive measure in order to contain its implications on economic activity, especially in the tourism and retail sectors. Therefore, unless the coronavirus outbreak worsens, we anticipate BNM to keep its OPR unchanged throughout 2020 as it guided that the current OPR level of 2.75% is appropriate in sustaining economic growth with price stability.

Source: Affin Hwang Research - 23 Jan 2020