Short term hitch in global growth – due to weather conditions in the US and uncertainties in Europe pretaining to the situation in Crimea and sanctions against Russia. China’s structural changes and tax hike in Japan adds to worries. However, production and exports remain on a steady upward trajectory, which goes to show that fundamentals are on the mend.
Exports on the mend – Improving external demand and sustainable domestic growth should be able to keep 2Q14 GDP around 5.0%, just a slight lower than our 1Q14 estimate of 5.1%. Overall 2H14 GDP growth is projected to average by 5.1%.
Better 2H14 – growth will be driven by gradually improving global economy, led by the US and Europe as well as other developed economies. Sustainable domestic demand growth would also lend support to 2H14 uptrend projected at 5.6%. Given the global growth uncertainty our whole year GDP forecast is 5.0-5.5% (2013: 4.7%).
Further fiscal consolidation – both public and private sectors are keeping their belt tight and patiently wading through inflationary pressures as a result of fiscal consolidation. Baring any external shocks, this should be able to reign in debt and deficit. Fiscal deficit is projected to narrow to 3.7% of GDP (-3.9% of GDP).
Inflation above long term average – Inflation remains cost-push and will take a while to normalize the impact of subsidy rationalisation and regulated price increases. Average CPI rate would remain elevated for much of the 1H14 but should taper off by the 2H14. Our full year CPI forecast is 3.3%, up from 2.1% in 2013.
Interest rate to stay pat – Current rates are supportive of the economy and with inflationary pressures being non pervasive, it gives little reason for BNM to raise the OPR for the rest of year.
Ringgit to remain volatile – QE tapering, emerging market uncertainties and US dollar strength will add volatily in the forex market. The recent widening of the Yuan trading band would add downward pressure on regional currencies in the short to medium term. Though fundamentals would support the ringgit, it would remain volatile in the ST. Our year-end USDMYR forecast is 3.21 (2013: 3.17).
Macro balance manageable – Despite the capital outflows, the situation remains manageable and the current account balance continues to remain in a surplus. Though federal debt is starting to scrape the 55%, macro prudential measures and fiscal consolidation steps has already been put in place to reduce public debt and narrow the fiscal deficit.
Some risk remains – Fiscal consolidation may end up hampering domestic growth beyond unwarrented levels whilst risks from Europe, China and Japan may be prolonged, jeopordizing overall growth.
Beyond 2014 – The higher possibility that the Fed would hike interest rates and the impact of the implementation of GST next year would generate an interesting macro environment with a possible downside bias to the economy and the financial market in the 1H15. On the expectation of further improvement in the global economy and a steadier domestic growth traction in the 2H15 we expect economic growth may stay above 5.0% next year.
Source: Kenanga