Growth will sustain amid slight moderation

• GDP growth momentum is expected to remain strong, but with a moderation from 2017

• Private consumption remains the engine of growth, but faces risks from higher cost of living; rising unemployment rates and high household indebtedness

• Real GDP will grow by 5.4% in 2018, with one OPR hike in 1H18

Executive summary

Global macro conditions in 2017 had been encouraging, with improving commodity prices, increasing trade activity and steady pace of economic growth. This may likely ease, going forward, with risks from geopolitical risks such as Brexit and tensions between US and North Korea provided some headwinds towards economic prospects.

Major central banks besides US Fed and BOE have been turning slightly hawkish in their respective monetary policy actions. Changes in the Fed and BOJ are also imminent.

Malaysia as an open economy benefited from stronger global demand (trade growth YTDOct17: +21.3% vs 2011-2015 CAGR: +3.6%) amid a weak Ringgit.

Gross exports will likely to register steady pace of growth in 2018 as demand for E&E is expected to be sustained.

In the domestic sector, private consumption, which has registered improved performance in recent quarters, will remain the engine for growth next year. We see private consumption growth to stay steady at 6.3% in 2018 (2017e: +7.0%).

Government’s initiatives such as cash transfers, personal income tax rate cut and consumption-stimulating measures from Budget 2018 would remain supportive of household spending.

However, downside risks to private consumption are rising cost of living from cost-push inflation; rising unemployment rate (YTD-Oct17: 3.4%) and high household indebtedness (85.6% of GDP as of 1H17).

On government expenditure, the tight fiscal allocation in Budget 2018 suggests limited space for public expenditure growth. In fact, most of the economic measures announced during Budget 2018 appear to be continuation of existing policies, rather than fresh initiatives.

We believe that Bank Negara may consider a 25bps Overnight Policy Rate (OPR) hike by March or May 2018, depending on the timing of the GE14. While inflation is expected to expand by 3.0% - 3.5% (2017e: +4.0%) on cost-push pressure, core inflation (ex. Food and Transport) remains manageable on the back of weak demand pull price pressures.

On the ringgit, we expect it to strengthen further in 2018, driven by capital inflows amid improving domestic macro conditions and interest rate hike.

We forecast 2018 real GDP growth to be 5.4%, lower than the expected growth rate of 5.8% last year.

Source: Alliance Research - 5 Jan 2018