Bank of America Merrill Lynch cuts Singapore, Malaysia GDP forecasts for 2019 on trade war concerns

Analysts at Bank of America Merrill Lynch (BofAML) have cut their economic forecasts for the Asia-Pacific for 2019, citing the escalating trade tensions between the United States and China.

The region is likely to feel the pressure from lower exports to China, as well as a prevailing sense of caution, the researchers wrote, naming Malaysia and Singapore as trade-dependent South-east Asian economies that are relatively more integrated with China's supply chain.

While above-trend US growth could offset the adverse impact of disrupted trade channels, the two neighbours are highly dependent on Chinese final demand, the analysts wrote.

"Export growth could suffer as external demand softens and trade flows dry up," they added, although Singapore could still notch above-trend growth if improved domestic demand counters the decline in outward-oriented sectors.

"Meanwhile, we see Malaysia growing at a below-trend growth rate in 2019 as domestic headwinds compound the external risks. The government will need to embark on a substantial austerity drive to keep fiscal deficit contained, which would spill over to domestic consumption and investment demand."

BofAML lowered its gross domestic product (GDP) outlook for the Asia-Pacific region by 0.3 point to 5.4 per cent, and trimmed the forecast for both Malaysia and Singapore by 0.2 point. They now predict 4.5 per cent growth for Malaysia and 2.8 per cent growth for Singapore.

But it kept their GDP projections unchanged for the rest of Asean, citing below-consensus expectations for the Philippines and Thailand.

"We also recently revised down our growth forecasts for Indonesia, but still see sufficient momentum for growth to stay above 5 per cent," the analysts added