Pace of M'sia's 4.3% Q3 growth 'tough to sustain'

Kuala Lumpur

MALAYSIA'S GDP (gross domestic product) growth of 4.3 per cent for the third quarter surprised on the upside, but economists expect the pace will be tough to maintain because of a number of factors, including high household indebtedness and soft manufacturing orders.

With GDP growth to September averaging 4.2 per cent, full-year expansion is expected to be of a similar quantum of 4.1-4.2 per cent. Compared to the more optimistic official GDP growth projection of 4.5-5 per cent next year, AllianceDBS and AffinHwang Capital's forecast is 4.4 per cent while RHB Research has pencilled in 4 per cent.

In the quarter to end-September, the growth pick-up was the first in seven quarters RHB observed, coming on account of an acceleration in consumer spending and a rebound in net exports. Consensus forecast had pegged Q3 growth at 4 per cent.

"Going forward, the Malaysian economy will likely continue to be led by domestic demand with the private sector as the main growth driver, while the external sector is envisaged to remain challenging," RHB wrote in an economic report.

However, notwithstanding private consumption grew 6.4 per cent year on year in the third quarter, "the underlying trend still implies weakness in household consumption", AllianceDBS observed.

It explained a closer inspection on a seasonally adjusted quarter-on-quarter growth basis showed private consumption slowed to 0.2 per cent from +0.7 per cent in the preceding quarter, and was the third straight quarter of moderation. "This is reflective of the bearish trend seen in the MIER consumer sentiments index which fell during 3Q16 (73.6 points vs 2Q16: 78.5)."

Declining production and new orders can also be gleaned from the Malaysian manufacturing PMI (purchasing manager's index ), which dipped to 47.2 in October (48.6 in September) for the lowest reading since June.

Amid subdued external trade and fiscal consolidation at the government level, domestic demand will be crucial to determining growth. Putrajaya has sought to boost demand through proposed measures including higher cash handouts to lower-income households as well as many other groups including civil servants and pensioners.

Still, with household debt remaining sticky at 89 per cent of GDP there appears to be little room for expansion in private consumption, particularly as a significant portion of borrowers are in the bottom 40 per cent of households. Central bank data indicates households earning less than RM3,000 (S$979) a month account for 23 per cent or nearly a fourth of total household debt.

However, they are more financially stretched as their leverage ratio is seven times their annual income on average, compared to three times for higher-income households. Creeping unemployment is the other worry; at 3.5 per cent it is above the 2010-2015 average of 3.1 per cent. Coupled with slow income increases and the rising cost of living now made worse by the ringgit's recent slide towards the 4.40 to the US dollar mark most households are already struggling to keep to budget never mind spend more.

AffinHwang expects the currency volatility - mainly due to changing investor sentiment and portfolio rebalancing after Donald Trump unexpectedly won the US presidential election - to be temporary. Its forecast is for the currency to strengthen to 4.20 by year-end. CIMB said bearish charts indicate the ringgit could potentially plunge to between 4.50 and 4.80 in the next three to six months.