Wednesday 17 October 2018

Economic Insight: Lower Growth in 2019?


Economic growth edged lower in Q2 of 2018 across most of the South-East Asia economies, with average GDP growth for the region as a whole easing to 5.2% year-on-year, down from 5.4% in Q1. Indonesia was the exception with GDP growth accelerating 5.3% on the year, up from 5.1% in Q1.

Amid increasing global headwinds, including escalating US-China trade tensions and the added pressures of a stronger US dollar and rising US interest rates, ICAEW Economic Insight expects economic growth across the region to cool further in the second half of 2018 through to 2019.

In Malaysia’s case, household spending will remain the key driver of GDP growth through to 2019. However, most other domestic demand components are forecast to cool. Public spending will be moderate as the new government reviews major infrastructure projects and undertakes plans to prune government expenditure. That said, there exists a number of uncertainties surrounding the government’s fiscal decisions.

The government is committed to improving its fiscal deficit. The reinstated Sales and Service tax (from September) will only apply to ‘selected services at 6% and will cover a smaller range of goods and services compared to GST. It may not be sufficient to fill the revenue gap caused by the removal of the GST (which accounted for around 18% of revenues in 2018).

In the short term for Malaysia, the new government has some fiscal space with oil tax revenues likely to be higher than previously projected. Oil prices are projected around US$75pb on average in 2018, compared with the previous government’s expectation of US$52pb. The disbandment of several ‘politically-linked’ departments will also help ease some of the fiscal pressures.

However, if the government remains committed to lowering the fiscal deficit beyond this year, further expenditure cuts and/or a new source of revenue generation will be needed. Base case is that government will tolerate some fiscal slippage to support domestic demand amid moderating export growth. Overall given the weaker than expected Q2 GDP outcome ICAEW Economic Insight has downgraded 2018 GDP growth forecast for Malaysia to 4.9% with GDP expected to grow by 4.7% in 2019.

Reference:
ICAEW Economic Insight (reports are produced with ICAEW's partner Oxford Economics)

This Photo by Unknown Author is licensed under CC BY-NC-ND


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