• Global synchronous growth to continue but risks remain. Our theme of synchronous global growth remains with Europe ex. UK being the notable star performer. However, despite brighter economic prospects, careful policy choice and management of region-specific risks will be instrumental in making the most out of the optimism.
• Malaysia’s GDP growth likely to moderate further. Despite a strong 1H17 of 5.7%, we expect growth to be dialled down to 5.4% in 3Q17 and thereafter 4.8% in 4Q17. While external demand is overall supportive of growth, we are less optimistic on domestic demand gaining much traction.
• Manufacturing growth to taper off on weaker new orders. We believe that industrial production may have somewhat peaked with signs that domestic new orders have weakened notwithstanding sustained export orders. However, manufacturing sector growth is expected to remain elevated relative to 2016, if levelling off a touch.
• Services sector likely dialled down on weaker retail sector. We do not see a strong growth story in consumer sentiments and confidence sustaining service sector growth, particularly for the retail sector with retail associations pointing to a more downcast distributive trade outlook for the rest of the year.
• Higher oil price likely transitory. Despite oil hitting a recent high, we believe that the presently higher oil price is unlikely to be sustained as short-term factors gradually subside and more shale production comes online to capitalise on higher oil prices. Our base case estimate of USD47-52/barrel for 2017 remains.
• Inflation to ease as base effect normalises. Notwithstanding the mild uptick of inflation in recent months over higher fuel prices, we are positive that inflation will continue easing largely as the low base effect (especially in 1Q16) subsides. We expect average inflation to settle at around 4.1% for 2017 and ease further to 3.3% in 2018.
• OPR likely to stay. Absent of any need for monetary policy intervention for growth or inflation management, we expect the OPR to be maintained at 3.00% for both 2017 and 2018. While inflation and growth situation is not set in stone, at present, we do not see any immediate justification to adjust its current accommodative stance.
• Fiscal targets likely achieved on strong growth; revenue enhancement. While we are likely to see some possible expenditure uptick as we approach an election, we believe that the 3.0% fiscal consolidation target is achievable on a higher GDP growth base and higher revenue from improved collection and higher oil revenue.
• Ringgit to remain volatile on event risk. Volatility will be a mainstay in evaluating the ringgit both in the short term and the long term as event risks, including US-North Korea tensions. We expect the ringgit to be volatile at USDMYR4.20- 4.30 in the short term, though likely to improve to 4.15 by the end of the year.
• Slim chance of capital outflows reversing. With increasing volatility stemming from event risks, we see an increasing risk-off sentiment for the region, hence lower odds of capital outflows reversing – albeit likely levelling off – in the near term.

Source: Kenanga Research - 5 Oct 2017