Domestic demand expected to spur economic activities in region

KUALA LUMPUR: Despite the outcome of Donald Trump’s presidency, Asia is expected to be the centre of growth, ultimately driven by domestic demand, according to an economist.

Domestic demand in the region is improving and strengthening, as there are more regional integration and strengthening of ties between China and South-East Asia, said UOB Malaysia Bhd economist Julia Goh.

“With initiatives like ‘One Belt, One Road’, we see that domestic demand will continue to play a greater role in this part of the region.

“We have yet to see how hard Trump will go on his trade protectionist measures.

“If he does do what he says he will, then it will be negative for trade.

“However, I believe that there will be sufficient check and balance in the Congress, so some of Trump’s proposed policies may actually change,” she said a media briefing.

The post-US election results reaction was found to be more muted as compared to post-Brexit, as markets were quick to stabilise and closed higher overnight.

Goh said that with Trump as president and Republicans gaining control of the congress, senate and house, tax reforms and infrastructure spending would be able to push through, presenting a near term economic boost for the US economy.

The biggest uncertainty lies in Asia, in view that Trump pledged to renegotiate trade deals scrap the Trans Pacific Partnership Agreement (TPPA) and clamp down on immigration.
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Countries like China, Japan and Korea have larger trade surpluses with US, which stand to be Trump’s targets for potential tariffs.

“What Asean and Malaysia will feel is the indirect effect of the tariffs.

“If there are tariffs set on China, it will affect trades with China and China’s trade with the rest of the region.

“But until we get more clarity on Trump and the Republicans’ trade policies, it is difficult to assess the precise impact these tariffs would have on Malaysia,” explained Goh.

Malaysia’s trade with US has declined from 16.8% of total trade in 2004 to 8.8% in 2015, while trade with China has moved up from 8.1% to 15.8% respectively.

Trump’s presidency aside, the Malaysian economy is expected to expand moderately next year, driven by domestic consumption, mega infrastructure projects and foreign direct investments (FDI).

The economy is to benefit from FDI inflows resulting from the large pipeline of infrastructure projects over the next five years.

Gross FDI inflows rose 3.2% year-on-year to RM67.7bil in the first half of 2016.

In addition, the nation’s gross domestic product (GDP) is likely to expand moderately to 4.5% in 2017, from 4.2% this year, fuelled primarily by consumer spending.

“Both public and private sector consumption currently accounts for two-thirds of Malaysia’s GDP.

“This trend is projected to continue into 2017, supported by new government initiatives, tourism and stable unemployment rates,” said Goh.

She added that the government’s financial aid and tax relief measures for the lower and middle income groups will help hold up private consumption.

As announced in Budget 2017, the higher cash aid allocated to low income households, lifestyle tax relief and giveaways for civil servants will help alleviate the effects of higher living costs and reinforce private consumption growth.

These government stimulus measures are expected to contribute 0.8% to growth.

Meanwhile, stable unemployment rates and high labour participation are lending to Malaysia’s domestic consumption growth.

The labour force participation rate is currently high at 67.8%, and with companies still realising profits, the average nominal wage growth is expected to stay positive.

“Our positive outlook for domestic consumption is further supported by Malaysia’s tourism growth.

“The number of tourists who visited Malaysia in the first eight months of this year grew by 3.8% to 17.6 million, largely due to the higher number of visitors from China and neighbouring Singapore, Thailand and Indonesia,” said Goh.

As for markets and currencies, the volatilities will continue to be present until most of next year.

Over the next few weeks, the currency could trade in the range of 4.22 to 4.28 due to lingering uncertainties, but UOB Malaysia expects the ringgit to trade at 4.15 against the US dollar by the end of 2016.

“The ringgit is expected to trade higher to about 4.08 by mid-2017, supported by stable oil prices, a return of confidence, following the US presidential elections and the US Fed’s gradual approach to raising interest rates.

“Global risk factors will continue to impact the currency’s strength and the pace at which Malaysia returns to a stronger growth environment. Against these global challenges, Malaysia will need to carefully manage the balance between monetary and fiscal measures to support growth, ensure stable inflation, manage financial risks and maintain fiscal prudence,” said Goh.