5 April 2019
Malaysia’s new normal

A decent growth rate among Asian countries, 4-5% will be the new normal for Malaysia, and that is where we see it staying in the medium term. Stretched public finances will limit the scope for fiscal stimulus but low inflation has opened doors for monetary easing 

New government policy shift suppressed both growth and inflation

Malaysia’s economy expanded by 4.7% in 2018, but the slowdown in growth from 5.9% in 2017 was the result of domestic and external drags. Domestically, there was an overhaul of economic policy after a surprise change of government in May 2018. And soon after taking office, the new government scrapped the goods and services tax - the key revenue source for the previous government and also suspended infrastructure investments.

While such a policy shift was positive for the economy to an extent, (via a boost in private consumption), it hit investment spending hard. Overall domestic demand shaved off 2.4 percentage points from annual growth in 2018 and was dragged down further by inventory de-stocking among other things. 

Despite these headwinds, 14% annual export growth was outstanding performance among Asian economies

Externally, firmer commodity prices supported exports in early 2018, but export prospects deteriorated with increased US-China trade tensions and the renewed oil price slump in the second half of the year. The silver lining in all of this was electronics exports managed to ride out the 'tech slump' observed elsewhere. Despite these headwinds, 14% annual export growth was outstanding performance among Asian economies.

The removal of the goods and services tax in June 2018 was a godsend for consumers as it brought inflation below 1%. The re-introduction of a more benign sales and services tax didn’t do much to lift prices either. The average annual inflation of 1% last year was a sharp dip from nearly a decade-high of 3.8% in 2017.

Singapore: Safe port in a storm

The trade war and global tech slump are weighing on Singapore's economy, and 2019 will not be a year to remember. But this economy is well poised to bounce back and benefit from any positive trade news and the next wave of tech demand, which could be exceptional

Singapore's longer term strengths are near term weaknesses

Singapore is a well-run, prosperous economy with ambitions as a tech hub to supplement its other industrial strengths. These are sensible aims, although admittedly difficult to legislate for. But primarily, Singapore is a small and extremely open economy in the middle of a region which is being hit not only by the trade war, and associated spillovers, but also from a global slump in technology demand. Longer term, we have no worries about Singapore’s future. Near term, things could require some policy support.

Taiwan’s economy: Still waiting for an export rebound

The US-China trade war has hit Taiwan's manufacturing, exports and the demand for new smartphones, and fiscal and monetary policy can only do so much to help drive the recovery. 5G equipment production could provide some support, but before that happens weaker corporate earnings may lead to capital outflows and a softer currency

Taiwan economy is currently under pressure from external factors

Taiwan's economy is a small and open one, which is why the export sector is important to its manufacturing and related service industries such as ports and logistics. But since mid-2018, the external environment has turned negative for Taiwan.

Latest figures show export orders have contracted by 10.94% in February 2019, while exports have contracted by 8.8% since November 2018.

China’s stimulus is working but debt and external political pressure is growing

China's ongoing trade war with the US will hurt the jobs market and spending power. While this is being countered by stimulus measures, debt levels will increase. China's tourists have helped lower the current account to almost zero, but that might all change in 2019. China is likely to face more external political pressure as it continues to grow

With stimulus in place, Chinese growth is likely to be above 6%

With a sizeable stimulus and monetary easing in place, we expect the Chinese economy to grow above the 6% lower boundary target set by the government. 

The 'two sessions' meetings held in early March set a fiscal stimulus package of CNY 4 trillion, of which around half was tax and fee cuts. The other half is coming via local government infrastructure projects, including new metro lines and toll roads. Aside from the stimulus, some local governments have quietly relaxed housing regulations too.

With a sizeable stimulus and monetary easing in place, we expect the Chinese economy to grow above the 6% lower boundary target set by the government

On the monetary side, the central bank has adopted a targeted approach. This directs extra liquidity flows mainly to small private firms, which have been the hardest hit by the ongoing US-China trade war. On top of targeted liquidity for private firms, we expect four required reserve ratio (RRR) cuts in total. We've revised down each cut to 0.5 percentage points from one percentage point after the central bank governor said there is limited room for cuts in 2019.

Indonesia: Reforms needed for lift-off

Indonesia has seen growth plateau at the 5% range since 2016.  After targeting 7% since taking office in 2014, President Jokowi looks to secure a fresh term with the current administration forecasting the fastest pace of growth in the next two years

Recent Growth and outlook: On cruise control with elections ahead

Growth in Indonesia has hovered about the 5% level in recent quarters and given the nation’s solid fundamentals will likely keep to this range in the near term.  The administration however is now forecasting economic growth to average 5.3% in 2019 and at 5.3-5.5% in 2020 against a backdrop of benign inflation.  The elections in April are expected to boost economic growth on the consumption side but more investment and reforms will be needed to achieve lift-off and break free from the 5% level.     

Inevitably the growth trajectory will depend largely on the elections, with incumbent Joko Widodo (Jokowi) vowing to continue his infrastructure and investment push while challenger Prabowo Subianto (Prabowo) has pledged to ban imports of agricultural products, lower the reliance on imported oil and reinstate fuel subsidies cut by Jokowi.        

Thailand: Steady economy amid political risks

Prime Minister Prayut Chan-o-cha is likely to remain in power at the general elections next month, though the transition to the new government under him may not be smooth. Absent a significant political shock, the economy will be on a steady 3-4% growth path and the currency will continue to be an Asian outperformer in the medium-term

2018 wasn’t all that bad with firmer growth

Thailand’s economy grew by 4.1% in 2018, the best performance in the last six years. However, it was not much of an improvement from the 4% growth rate recorded in the previous year and underlying drivers of growth weren’t very impressive either. As in 2017, a large contribution to growth came from inventory re-stocking, which isn’t a healthy sign as the potential inventory overhang is likely to keep future output growth subdued. There was some improvement in domestic demand but the all-important investment demand continued to be anaemic and lacked a material boost from public investment. Meanwhile, narrowing external trade surpluses held headline GDP growth down.

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What’s happening in Asia ?

The US-China trade tensions have had a significant impact on Asian countries. But fiscal stimulus in China is helping, Taiwan is hoping that 5G equipment production comes to its rescue soon. Singapore's small and open economy is still hurting from the global tech slump while Japan continues to suffer from the perennial problem of low inflation 

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