Malaysia spending trackers flash 'reality check' growth warning

[KUALA LUMPUR] With the nation's key oil exports falling and budget cuts coming, Malaysia still had consumer spending as a prop for growth late last year.

That pillar may be weakening, escalating the risks for a middle-income economy that expanded an average 5.8 per cent in the past half decade. Measures of manufacturing wages and credit-card spending are the weakest since at least the global financial crisis, according to inflation-adjusted data compiled by Bloomberg.

Malaysia's currency, the worst performer against the dollar in Asia in the past three months, is already lumbering under concerns foreign investors will pull out their money as the Federal Reserve prepares to raise US interest rates. Prospects for weaker growth threaten to add to the gloom.

"Malaysia needs a reality check," said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. "In the past, consumer spending has held up so well that it could buffer any surprises on the exports side, but this time I suspect consumers may be in for a rougher ride." Consumer sentiment is deteriorating, even with fuel and electricity costs now falling in the South-east Asian nation. Malaysians had seen prices of essential items from sugar to gasoline climb in recent years as Prime Minister Najib Razak curbed subsidies to improve state finances, and are now bracing for a new goods and services tax that will start in April.

"Things are getting a bit more expensive," says Juliana Alwi, a 50-year-old housewife who says her husband's salary isn't growing much. While shopping for groceries this week in a Kuala Lumpur mall, she said she will stop buying clothes that aren't essential, and shift to less expensive make-up brands.

Subdued wage growth, job cuts at some state-owned companies, elevated household debt and stricter access to credit are restraining domestic spending, Mr Chua said.

The ringgit fell 0.1 per cent to 3.6045 a US dollar in Kuala Lumpur yesterday, even after a report showed economic growth unexpectedly accelerated last quarter. It's fallen more than 7 per cent in the past three months, the worst performer among 11 major Asian currencies tracked by Bloomberg.

Malaysia, along with Indonesia, has the lowest reading in the Bloomberg Brief Domestic Demand Barometer in Southeast Asia, according to Tamara Henderson, an economist with Bloomberg Intelligence.

"These economies have higher sensitivity to oil-price movements," she said in a January report. "Malaysia has scope to underperform owing to a much larger deterioration in real wages."

Malaysia's manufacturing wages, adjusted for inflation, fell more than 2 per cent in December from a year earlier, the biggest decline since September 2009, while credit card balances fell every month in 2014, the longest slump since at least 2006, data compiled by Bloomberg shows. The two measures have tracked consumption patterns, history shows.

Consumer confidence fell to the lowest level in a year last quarter, an index by the Malaysian Institute of Economic Research showed. That may curb the private consumption that helped the economy expand 5.8 per cent last quarter from a year earlier. After sentiment slid to an almost five-year low in the final quarter of 2013, private consumption growth eased in the next six months.

For now, consumer spending has been held up by "healthy" economic growth of the past few years, bonus payments, government handouts to the poor and festive spending ahead of the Chinese New Year celebration this month, said Tan Hai Hsin, managing director of Retail Group Malaysia, a consulting firm. Malaysians are also front loading purchases before the new tax in April, he said.

"Domestic demand will remain as the key driver of growth," Malaysia's central bank said Jan 28. "While private consumption is expected to moderate, it will remain supported by the steady rise in income and employment, and the additional disposable income from the lower oil prices." Aeon Co (M) Bhd, the Malaysian unit of the Japanese retailer, has fallen 24 per cent over the past six months. The benchmark stock index has fallen more than 3 per cent in the same period.

"The greatest challenge in 2015 for the retail industry in Malaysia is consumers' spending," said Mr Tan of Retail Group, citing the new tax and cutting his industry sales forecast for this year to 5.5 per cent from 6 per cent. "For the six-month period after April 2015, retail sales will likely slow down." Rate Increases Interest-rate swaps show traders have lowered their expectations for an increase in borrowing costs in the next year.

"Consumer spending and investments are still expanding albeit just at a slower pace," said Julia Goh, an economist at CIMB Group Holdings Bhd in Kuala Lumpur. "Policy makers will have to make some tough decisions to ensure that growth is supported, inflation is manageable and shoring up confidence in the ringgit." Malaysians like Lee Chau Shiang are choosing the path of austerity for now.

"I am spending a lot less nowadays," said Mr Lee, 28, who worries the April tax will hurt his video production business and is saddled with loan payments for his car, motorcycle and home that sap almost 70 per cent of its monthly income of about RM4,000 (S$1,507). "I seldom think about nice dinners anymore."

BLOOMBERG