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Saturday, December 26, 2015

Economic Outlook 2016 [Malaysia]



2015 has been a rather forgettable year for Malaysia. 

The FBM KLCI closed at 1,761.25 points on 31st December 2014 but was last seen at 1,663.51 points on 23rd December 2015 before the market was closed for public holidays on 24th and 25th December....it's a drop of about 5.5%. That is before the Ringgit is being taken into consideration. The RM was one of the worst performing currencies in 2015.

Chart taken from marketwatch.com
 
How 2016 will look like for Malaysia is the BIG QUESTION mark as we head into 2016 within a week's time.

Emerging economies slowdown has been a real concern to global economy including Malaysia, especially with China. The slowdown is exerting downward pressure on commodity prices. While we are expected to see an improvement in the US economy and a moderate recovery in the Eurozone, 2016 is also the year where China is expected to see further decline in their growth. This has hurt the Asian economies as weaker global trade and softer domestic demand takes place. The strengthening US dollar across the board, triggered very much due to the policy divergence between the US and the rest of the world has to a certain extend pulled the commodity prices to a level not seen since the global financial crisis in 2008/2009. This is particularly true with the oil prices. The slump has continued especially after the Organization of Petroleum Exporting Countries (OPEC) recent decision in a meeting not to curb its' production in the near term. This will also be crucial to how the economy in Malaysia will perform in 2016. 

Moving forward, the prospect of the commodity prices depends largely on these factors:

a) Future Supply Conditions
b) Global Demand, particularly China
c) Strength of the US Dollar

FUTURE SUPPLY CONDITIONS

For crude oil in particular, the pace of production by OPEC and non-OPEC members will determine the direction of their prices. With the Saudi-led OPEC's decision not to curb its' production in order to win the market share, it is unlikely that we will see a lack of future supply.

GLOBAL DEMAND

CHINA
China's economy is expected to soften further in 2016 to 6.5% to 7% as exports are not likely to recover sharply in 2016 and investments continue to be dragged down by weaker sentiment. The China's official Purchasing Manager's Index (PMI) fell to the lowest level in more than 3 years in November indicate a weaker manufacturing conditions and the deflationary environment in the country persists even after the People's Bank of China (PBoc) had made six rounds of interest rate cuts since November 2014 is a concern. Even with that, analysts believe moving forward, China will not experience a hard landing and believe there are still room for the PBOC to adjust its policy since the reserve requirement ratio remains relatively high. More fiscal stimulus is also expected to avert an abrupt deceleration in its' headline growth.

United States of America
The United States of America is probably the good news that we will be reading as the US Labour market conditions strengthen (a near level of full employment) and wage gains are also slowly improving. The first rate hike in December 17 has caused a knee-jerk reactions in financial markets and the greenback has strengthened across the board. Moving forward, analysts anticipate a rather similar trend as observed in the rate hike period in 2004 to 2006 which saw the greenback slowly weakening after the first rate hike as bullish expectations were already priced in prior to the hike.

EUROZONE
The Eurozone appears to be finally stabilized. Germany, as had been in the past continue to be the growth engine of the region, with a strong export sector, low unemployment, strong housing and manufacturing sectors and a balanced budget. The euro's depreciation against the USD has revived its' trade performance. The lower oil prices also helped to boost the region's trade surplus, up by 50% in the first nine months of 2015 compared to the corresponding period in 2014. Moving forward, the eurozone is expected to experience a slow and unglamorous pace of recovery but with its' downside risks slowly diminished. However, the moderation of emerging economies especially China might hurt the economy in Eurozone as well. The relatively high unemployment rate in the region is also a concern.

MALAYSIA
The country's economy continues to decelerate and real growth domestic product (GDP) growth will likely to settle around 4.7% in 2015. Generally, this was due to external sectors although the exports have recovered in ringgit terms since June 2015 although it continue to register negative growth in the 13 months to October 2015 in US dollar terms. Moving forward, with the slumping oil prices, the petroleum-related exports will likely to register a further decline. Support on the other hand is expected to be coming from the electronics and electrical (E&E) and palm oil segments which have benefited from the weaker ringgit. Consumer spending domestically will likely to continue to bear the brunt of higher prices resulting from cost push factors. It is likely that the private consumption growth will weaken to 4.2% in 2016. 

Moving into 2016, the impact of the slowdown in the domestic demand will likely to cause the real GDP growth to remain below its' potential but more positives are expected in the second half of 2016 as the impact of the current rout in commodities will slowly diminished by then. This was because while the current bleak outlook is painted on the crude oil futures, it is likely to see a slight recovery in prices by then. This is especially if the growth in demands remain positive and the prospects of stability in China emerges. In addition, the supply growth will likely to taper off if oil prices remain at the current level. Such a scenario will help Malaysia in its external sector going forward. The real GDP growth is expected to average about 4.4% in 2016.



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