WITH the trade war between US and China showing no signs of receding, the Malaysian economy could take a hit if two of its largest trading partners fail to resolve their tension, said economists.

Malaysia could avert a recession but it will most likely have to deal with a slowdown in economic growth, said Sunway University Business School professor of economics Dr Yeah Kim Leng.

A full-blown trade war could potentially shave one or two percentage points off global growth and impact Malaysia.

“Many economies will tilt into recession or flat growth due to the anticipated sharp decline in world demand, financial market turmoil and investors’ flight to safety due to heightened uncertainties,” he told The Malaysian Insight.

“Malaysia will need to offset the expected decline in export demand and knock-on effects of capital outflow and foreign direct investment (FDI) by boosting domestic demand and counter-cyclical spending by the government.”

According to Yeah, the slowdown will become more pronounced if the trade war prolongs. 

The International Monetary Fund (IMF) last month revised its global growth projection from 3.5% to 3.3%.

IMF managing director Christine Lagarde said last week that the trade duel between US and China poses a downside risk to the global economy.

A senior research fellow at the Malaysian Institute of Economic Research, Dr Shankaran Nambiar said the trade war is a long-drawn affair fuelling uncertainty in global markets and lower growth.

“So yes, the hit that the global economy is going to take, will mean lower growth for Malaysia and this will negatively impact Malaysian exports.”

However, China’s One Belt, One Road (OBOR) initiative and palm oil exports to China could serve as a redeeming factor in the potential downturn.

Shankaran said Malaysia’s support for OBOR could translate into inflows of FDI and could further strengthen trade ties with China.

On the flip side, this could also lead to China increasing its exports to Malaysia, which will then become a big part of China’s global value chain. 

This could turn out favourably for Malaysia if it is able to add value to goods imported from China.

“This will give the Malaysian economy a boost that will counteract the negative effects of the global slowdown.”

Malaysia’s gross domestic product (GDP) growth of 4.5% in the first quarter of 2019 superseded expectations.

For 2019, Bank Negara Malaysia projects full year economic growth to be somewhere between 4.3% and 4.8%.

Meanwhile, the Paris-based Organisation for Economic Co-operation and Development (OECD) said in a statement escalating trade conflicts and dangerous financial vulnerabilities are seen as a threat which will weaken activities by undermining investment and confidence worldwide.

Highlighting the trade war as the key factor weighing on global growth, OECD said the world is expected to see moderate and fragile growth in the next two years.

“The fragile global economy is being destabilised by trade tensions,” said OECD chief economist Laurence Boone during the annual OECD forum in Paris. 

“Growth is stabilising but the economy is weak and there are very serious risks on the horizon. Governments need to work harder together to ensure a return to stronger and more sustainable growth,” Boone added.

OECD projects global growth at 3.2 % in 2019 and 3.4 % in 2020.

The last round of trade talks between top Chinese and American trade negotiators ended on May 10.

This was also the same day which President Donald Trump slapped a 10% to 25% tariff on Chinese goods worth US$200 billion. 

Trump upped the ante by putting one of China’s largest companies – Huawei – in the crossfire, by including it on the export blacklist.

US-based Alphabet Inc, owner of Google, has since cut ties with Huawei which includes hardware, software and technical services, except those publicly available via open source licensing.

As to the impact on the ringgit, Yeah, who is also Bank Negara’s external member of the monetary policy committee, said the ringgit weakening to below RM4.20 should be temporary.

The local currency has been on the downward momentum due to external risks.

“The flight to safe haven will likely see the dollar strengthening against most currencies but any ringgit weakening beyond RM4.20 to the dollar is expected to be temporary and self-correcting with support coming from continuing current account surplus, still positive growth and interest rate differential as well as support from commodity exports and trade diversion benefits,” Yeah said.

Malaysian Industrial Development Finance Bhd (MIDF) said in a note that it expects the ringgit to average at RM4.12 for the rest of 2019 and strengthening to RM4.10 by year-end. – May 23, 2019.