Economists see higher inflation in 2016

by **Cals** Thu 03 Dec 2015, 23:23

Economists see higher inflation in 2016

By Tan Siew Mung / The Edge Financial Daily | December 3, 2015 : 10:00 AM MYT

This article first appeared in The Edge Financial Daily, on December 3, 2015.

[You must be registered and logged in to see this image.]KUALA LUMPUR: Economists expect inflation in the country to edge up in 2016 and higher prices to further dampen consumption-driven growth.
Year to October, the consumer price index (CPI) has risen 2% driven by the goods and services tax but moderated by lower oil prices. In October, the CPI rose 2.5% from a year ago.
[size=16]United Overseas Bank (M) Bhd’s economist Julia Goh said inflation is expected to edge up next year mostly due to a low base effect particularly in the first quarter as well as cost adjustments owing to higher transport costs and currency adjustments.
“Low oil prices and weaker demand will help to cap higher price pressures, and we think that interest rates will remain on hold for most of next year as growth slows albeit still within the target 4% to 5% range,” said Goh.
Her inflation expectation is 3.2% in 2016, compared with 2.1% in 2015. Inflation came in at 3.2% in 2014.
Emily Dabbs, an economist at Moody’s Analytics (Australia) Pty Ltd, said rising inflation will become a problem in mid- to late-2016. She has forecast inflation at 3.1% in 2016.
“The central bank may not have much room to support domestic demand through lower rates, as the ringgit will likely remain weak as the United States looks to start the rate normalisation process.
“We expect the central bank will keep rates on hold through 2015, before rising inflation becomes a problem in mid- to late-2016 and the bank begins rate normalisation,” said Dabbs.
Goh expects moderation in domestic demand next year due to rising inflation.
“Higher cost of living, [a] weaker currency, job insecurity, and negative wealth effects have dampened sentiment and household spending. Though there is ongoing infrastructure investment, the pace of capital spending has slowed amid heightened economic uncertainty,” said Goh.
She is also of the view that growth and operating conditions for Malaysia will remain challenging in 2016, with key challenges being the uncertain path of US interest rates, China’s growth risks, global policy divergences, low commodity prices, volatile markets and the weaker ringgit.
“However, domestic demand will be the main anchor of growth albeit slower while we think exports should improve modestly,” she said.
“We think Malaysia will eventually adjust to a new normal of lower albeit robust growth of 4.8% next year (from 4.9% this year),” said Goh.
Brian Tan, a Nomura’s Southeast Asia economist, has forecast inflation at 4% in 2016, versus 2.2% this year.
He expects private consumption will likely remain supported by low unemployment rates and investment by ongoing projects under the Economic Transformation Programme and increased government development spending.
Tan indicated the biggest challenge for Malaysia’s growth is the slowing down of the Chinese economy. Therefore, domestic demand will be the main driver of economic growth next year.
As China’s gross domestic product (GDP) growth slows to 5.8% in 2016 from 6.8% this year, Malaysia’s GDP growth will likely moderate further but remain resilient at 4% next year from 5% this year, he said.
“We expect broadly similar [Crude Brent] oil prices next year of US$55 (RM232.10) per barrel from US$54 this year. This should have little impact on the Malaysian economy which has weathered the fall in commodity prices rather well this year,” Tan said. “With the growth outlook also resilient, we do not expect Bank Negara Malaysia to cut the policy rate. However, a rate hike is also unlikely in 2016 as downside risks to growth remain material.”
Meanwhile, Dabbs opined that falling export demand and depreciation of the ringgit will continue to pose a risk to Malaysia’s economic growth in 2016.
“If the ringgit depreciates further, the central bank may have to resort to increasing the policy rate to stabilise the currency as foreign reserves are quite low. This will dampen consumption-led growth, which will be important if the global economy remains subdued,” Dabbs said.
She added that the low global oil prices would continue to hurt the government coffers, and this could hinder infrastructure projects that are necessary for long-term growth.
“Oil prices look to have found somewhat of a floor, but are unlikely to rebound any time soon. This will keep a dampener on oil-related exports, but declining year-on-year growth should subside in 2016,” Dabbs said.
Thus, she expects Malaysia’s economy to soften to 4.7% in 2015 before ticking up to 5.3% in 2016.
On the ringgit, economists do not expect the currency to return to its pre-2015 levels in 2016 with the likelihood of a US rate hike and the bearish oil outlook while domestic political developments remain uncertain.
Although recognising that the ringgit is undervalued, Dabbs opined that falling demand for Malaysian oil products, expectations of a US rate hike and the 1Malaysia Development Bhd (1MDB) issue are still putting downward pressure on the ringgit.
“Much of the ringgit’s depreciation is due to falling investor sentiment. If sentiment improves, it will appreciate to around 3.60 in 2016,” Dabbs said.
Goh, who ruled out another bout of sharp yuan devaluation next year, said higher US interest rates as a driver of ringgit weakness had largely played out.
“While markets continue to watch domestic political developments, there is [a] growing consensus that the current government administration is likely to remain until the next general election. This leaves oil prices as the wild card given its high correlation with the ringgit,” she added.
Goh has set an end-2016 target for the ringgit against the US dollar at 3.96. A slew of catalysts lately, such as the steady climb of oil prices and the disposal of 1MDB’s energy unit Edra Global Energy Bhd to China General Nuclear Power Corp, have lent support to the ringgit to rebound.
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