ICAEW: Is Digitalisation Malaysia’s next engine of growth?
(L-R: Moderator Mark Billington, ICAEW Regional Director, Greater China & SEA with panel members Ainol Roznain Yaacob, Head of Country, BP Malaysia and Sian Fenner, Lead Asia Economist, Oxford Economics)
Malaysia’s economy is expected to grow by 4.4% in 2019, but is forecasted to slow down to 4% in 2020, against a backdrop of slower export growth and moderating domestic demand. This is according to the Institute of Chartered Accountant in England & Wales (ICAEW)’s latest Economic Update: South-East Asia report.
Malaysia’s sequential gross domestic product (GDP) momentum maintained a solid pace in 2019 with strong quarterly gains in private and public consumption; and positive inventory developments outweighing weaker investment and exports. However, as several tailwinds that have supported growth, notably household spending, continue to fade, the effects of the sluggish global environment will start to have a larger impact on the domestic economy.
Domestic demand to carry the day
Household spending remained a key driver of growth in 2019, growing 7% year-on-year (yoy), supported by subdued inflation and low debt servicing costs. Public consumption rose a solid 1% in Q3 2019, however the sharp 14.4% yoy decline in public investment remained a drag on GDP growth, subtracting 0.9% points from annual growth. Net exports added 1% point to annual GDP growth as a 1.4% fall in exports was more than offset by a larger 3.3% yoy fall in imports.
Sian Fenner, ICAEW Economic Advisor and Oxford Economics Lead Asia Economist said, “Although there has been some progress in the talks between the US and China, friction between the two countries remains high and the bulk of imposed tariffs are unlikely to be lifted anytime soon. Alongside slower Chinese domestic demand, we are cautious that the outlook for exports and private investment will remain challenging. As such, domestic demand will still be depended upon to carry the day.”
Overall inflation in Malaysia is forecast at 0.7% for 2019 with the likelihood of rising to 2.1% in 2020, on par with average inflation in the country over the past decade. Employment growth eased to 1.9% yoy in Q3 2019, while real wages grew by 0.5% in the same period. Wage growth is likely to remain soft in 2019 – 2020, rising at a more moderate pace as compared to 2017 – 2018.
How our neighbours are doing
Regional growth has slowed since 2018 and remained sluggish in Q3 2019, with GDP growth across the South-East Asia (SEA) region rising only 4.5% yoy from 4.4% in Q2 2019. The US-China trade conflict has been a key driver for this slowdown in growth, with trade uncertainty remaining a key drag on manufacturing, exports and investment.
Export-oriented economies have been the most impacted by the ongoing trade tensions, with Singapore only narrowly avoiding a technical recession in Q3 2019. A technical recession is defined as two consecutive quarters of negative growth.
The exception has been Vietnam, which has benefited from some trade diversion effects caused by the trade war. Nonetheless, momentum in Vietnam is expected to ease to 6.6% in 2020, from 7% in 2019, given weaker Chinese import demand and increased trade protectionism.
“We expect the ongoing trade tensions to continue weighing on the overall growth outlook for SEA economies. Against a weak global backdrop, supportive fiscal measures are expected to underpin an improvement in GDP growth across certain economies, albeit moderately. Overall, SEA’s GDP growth in 2019 and 2020 are still set to be below potential at 4.5%,” said Mark Billington, ICAEW Regional Director, Greater China and SEA.
Indonesia’s GDP is to moderate to 4.9% in 2020 from 5% in 2019, cushioned by accommodative monetary policies and fiscal measures. Its economy grew by 5% yoy in Q3 2019, broadly unchanged from the previous quarter, supported by a contribution from net trade that was better than expected.
On the other hand, domestic demand components are less positive, with a slowdown recorded in private consumption, government spending and fixed investment growth in the last quarter. In addition, net exports are forecasted to be a drag on growth in 2020 against the backdrop of sluggish global growth, weak Chinese domestic demand, and policy uncertainty surrounding US-China trade tensions. Continued import controls from 2018 and weak export earnings will also keep a lid on investment growth in the short term.
Is Digitalisation going to be the next engine of growth?
In the age of increasing digitisation and automation, powered by machine learning, what impact does it have on growth in the region?
Fenner opined that the increasing use of robots and automation will mean inadvertent displacement of jobs. In fact, Oxford Economics has conducted surveys across the Asean region and it shows that there is a likely job loss to the tune of 28 million. The industries most affected would be within the traditional realm and manufacturing sectors.
A way around it is a reliance on public policies to encourage an ecosystem which leads to creation of new and different jobs. This new economy will add to overall growth and productivity, GDP per capita, and ultimately higher income. It is just the question of making sure everyone gets an increase in that pie.
Ainol Roznain Yaacob, Head of Country, BP Malaysia’s view is that whilst the changing nature of the workspace may scare a lot of people, companies need to be prepared to reskill and upskill its employees. BP encourages fresh graduates and middle management to be more involved in robotics via programming courses including have long-term programmes where employees get to train in the IT department.
At the end of the day, one still cannot take out the human element… as of yet. There is a still a human skill around understanding the data that is in front of you and deciding how to act on it. He thinks that it will be a good 40 to 50 years before one can completely trust machines to run fully autonomously.
What people need to be more concerned of now is to think more about change and constantly improving things as they are.