19/11/2012 (The Sun Daily) - Malaysian economy remained resilient amid the challenging global economic conditions. Real GDP (RGDP) in the third quarter of this year (Q3 2012) outpaced both ours and consensus expectation to expand by 5.2% year-on-year, compared with ours of 4.9% year-on-year and consensus of 5.0% year-on-year.

With the average economic growth for the first three quarters at 5.3% year-on-year, we now expect the economic growth in 2012 to surpass the official estimates of 4.0%-5.0% and fall in line with our projection of 5.3%.

Where did the growth come from?

When we looked at numbers in detail, it clearly showed that domestic demand continued to spearhead the economic growth. It has been compensating for the shortfall in exports – hurt by slower demand from our major trading partners who are experiencing slower economic growth, hurt from the on-going global crisis.

Looking at domestic demand, it continued to expand in double-digits, up 11.4% year-on-year in Q3 2012 from 14.0% year-on-year in 2Q2012.

Growth came from gross fixed capital formation (GFCF), accounts for private and public investment. GFCF in Q3 2012 grew significantly by 22.7% year-on-year from 26.1% year-on-year in Q2 2012, powered by 22.9% year-on-year growth from the private sector (24.6% year-on-year in Q2 2012) and 22.4% year-on-year by the public sector (28.9% year-on-year in Q2 2012).

Robust growth from GFCF is not a surprise. On-going focused projects in services namely transportation, real estate and utilities and oil and gas boosted private sector capital spending.

Public sector spending also remained strong in transportation, oil and gas, education and utilities.

We expect GFCF to remain strong in Q4 2012 and continue to lend support to the economic growth in 2013. This would be more so with the announcement of another 20 projects under Economic Transformation Programme and growth corridors – that will bring in RM26.09 billion investments by 2020 and we expect positive effects to trickle from 2013 onwards.

Benefits will come via better job markets and improved business environment both directly and indirectly.

Further lending support to our optimism on GFCF is the healthy trend of imports and import components. Imports grew by 4.4% year-on-year in Q3 2012 from 8.1% year-on-year in Q2 2012. With the sustainable pace of imports growth, it translates into potential investment which we expect will yield positively to the economy in the coming quarters.

Apart from strong GFCF, consumption supported the economic growth. It grew 7.3% year-on-year in Q3 2012 from 9.2% year-on-year in Q2 2012. Bulk of the contribution came from private consumption, up 8.5% year-on-year in Q3 2012 from 8.8% year-on-year in Q2 2012 compared with public consumption of 2.3% year-on-year in Q3 2012 from 10.9% year-on-year in Q2 2012.

We expect consumer sentiments to stay positive in Q4 2012. Apart from the macro fundamentals, such as healthy labour market, benign inflation, robust income growth, financial assistance to the lower income households and Felda settlers, and higher salaries and pensions for civil servants and positive consumer confidence, we expect private consumption to benefit from the festive seasons in Q4 2012. Moving into 2013, consumer confidence is poised to stay healthy supported by firm economic growth which we project would expand by 5.5%-5.8%.

Growth would come from GFCF and improving exports. Private consumption is poised to remain healthy benefiting from the positive economic outlook and 2013 being 'Visit Malaysia Year'.

Meanwhile, as expected, exports performed badly in Q3 2012. It shrank by 3.0% year-on-year in Q3 2012 from +2.1% year-on-year in Q2 2012, dragged by the ongoing global crisis that choked our key export products like electrical & electronics (E&E) and to some extent the earnings from commodities as prices stayed soft. We expect the contribution from exports will remain weak in Q4 2012.

Going forward into 2013, our global outlook is more positive.

We expect the US economy to improve with the issue of fiscal cliff resolved. We project the economy will expand by 2.5% year-on-year in 2013 from 2.0%yoy in 2012.

The Chinese economy is also poised to be stronger in 2013, projected to grow 8.0% year-on-year from 7.8% year-on-year in 2012.

We reiterate our recession view for euro in 2012, expected to shrink by 0.5% year-on-year, but exhibit a modest recovery of 0.4% year-on-year in 2013. On the whole, our global growth projection for 2013 is 3.8% (previously was 4.1%).

With modest improvement in the global growth, we expect global trade to also improve. As such, the weak E&E sector should improve modestly from demand and low base in 2013.

Likewise, we expect commodity prices that include crude oil to be firmer in 2013. We project crude palm oil price to improve from RM2800 per tonne in 2012 to RM3050 per tonne in 2013.

Our crude oil projection for 2012 is US$94 per barrel and US$96.5 per barrel in 2013. We project exports will pick in 2013 to 4.5% from 1.5% in 2012.

On the back of a stronger economic outlook for 2013 and benign inflation, we believe the overnight policy rate (OPR) now at 3.00% will remain intact until the first half of 2013. We are of the view that there is no necessity for Bank Negara Malaysia to re-price downwards OPR given that inflation is tame.

The economic growth is strong.

With growth to be boosted by domestic demand and complemented by exports in 2013, inflation is expected to pick-up.

Should inflation pressure increases and global growth improve, we can expect Bank Negara Malaysia (BNM) to likely raise rates by 25 basis points in the second half of 2013. And for BNM to reduce rates, it needs more convincing, which is not there for now.

Anthony Dass is chief economist at MIDF Amanah Investment Bank Bhd.