29 December 2011

Kenanga Research 2012 Economic Outlook

The year 0f 2011 saw a confluence of mishaps, with the MENA unrest, Japan disaster, US debt ceiling scare and Eurozone's can of worms. We believe that it is very unlikely that 2012 will contain more uncertainties than 2011. After the convergence of these "Black Swan" events, there is also a lot of divergence in the recovery, making it difficult to coordinate economic policy.

  1. Firstly, there is a 2 speed-global recovery as developing economies, particularly Asia, is outperforming the West.
  2. Secondly, within Europe itself, there is a lot of divergence in how each country is coping with the crisis. Only Germany, Sweden and Switzerland have so far returned to pre-crisis growth levels; whilst Greece, Portugal and Ireland are clearly outliers in terms of demand growth.
  3. Finally, there is a lot of mixed recovery in Japan as well, where companies with capital of at least 1bn yen are back to nearly full capacity production as early as May. However, companies with capital between 10m and 100m yen will take longer to recover as their profits fell by 40% in 2Q11, compared to their larger counterparts, whose profits fell by only 4%.
2012 Outlook would be better?
Manufacturing momentum will only truly pick up in 4Q12. Given the bearish external conditions, we believe that the manufacturing recovery is still premature and that it could soften again in 1Q12. In fact, for 2012, we forecast that manufacturing growth will only exceed the 5%-threshold in 4Q12, based on our expectations that developed economies will only show some significant improvements towards end-2012. Collectively, US, Eurozone and Japan constitute more than a third of our total trade, so despite the growing importance of intra-regional trade, Malaysia cannot post a sexy growth number as long as this trinity is still faltering.

Policymakers in developed economies will be inclined to adopt 2012 as the "year of fiscal austerity". The extent of their cost-cutting is really the key to how 2012 will fare. If they overdo it, this will derail the already fragile recovery and could tilt the scale towards a recession. The Eurozone fiscal problem is still the number one risk for the global economy in 2012. We think that the more likely scenario is that Eurozone will choose to maintain its solidarity and they will continue to wade through the mess. Since we are expecting a pick-up in 4Q12, generally we believe that Eurozone is doing the best it can under the circumstances, although we would like to see politicians respond faster to market conditions.

We are maintaining our in-house GDP growth forecast of 5.1% and 5.0% in 2011 and 2012 respectively. The OPR is a sure bet to stay at current levels and our inflation forecast would depend on the timing of the General Election. A recurring theme in this report is time. The ETP projects need time to kick in, Americans needs more time to enjoy expiring fiscal stimulus, Eurozone needs to stall in hopes of better prospects and even the efficient Japanese find that 2012 is nearly upon them with a lot of rebuilding still left wanting. Time is of the essence.

Malaysia inflation to moderate. 
We forecast that inflation will still be able to ease to 2.9% in 2012 from an estimated 3.2% in 2011 despite the rise in global oil and food prices. Again, this is primarily due to a high-base effect but it is also because our economy is quite insulated thanks to our fuel subsidies. Our expectations for the ringgit to appreciate throughout the year will also help to reduce imported inflation from tainting our CPI.

Interest rates to stay pat. 
With expectations of a ringgit appreciation as well as easing inflation, there is no way BNM will hike the OPR from its current 3.00% level. As for the possibility of a rate cut, BNM will only exercise this option if a severe negative shock occurs.

Source: Kenanga Research

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