Domestic demand to rise

PETALING JAYA: While civil servants look forward to higher disposal incomes following the salary hike announcement yesterday, economists anticipate a corresponding rise in domestic demand among this population segment.
However, those contacted by StarBiz also concurred that inflation was not an immediate cause for concern with regards to the pay increase.
The salary increase of between 7.5% and 35% will benefit over one million civil servants and more than half a million pensioners.
Rating Agency Malaysia Bhd group chief economist Dr Yeah Kim Leng said a higher disposable income would lead to a higher propensity to spend.
“On average 60% is usually spent while the remainder goes to savings. Higher disposable income will help increase domestic demand,” he said.
Yeah said in the first quarter, there was weakness in the external sector due to slower growth in export.
“Local demand should offset the lower external demand, thus the pressure on price will not rise sharply. With the recent decline in inflation rate (since the peak last year), the knock-on effect will be limited,” he added.
With higher income, Yeah said there was a perception of longer-term wealth increase.
“This could help increase slightly capital purchases of cars and houses, but only in the long-term,” he said.
OSK Investment Bank economist Sia Ket Ee said the effect would be favourable to the economy, as most of the salary increment for civil servants would filter through to domestic spending.
“The impact on inflation will be very limited because for a broader economy, Malaysia is still operating below the potential of its growth.
“So, we do not really have inflationary pressure building due to overheating or over-demand,” he said.
Sia added that most of the disposable income would be spent on food items, for which the Government had a lot of control over prices.
In general, Malaysians spend 20% of their pay on food and about 22% on housing and utilities.
Sia said affordability to purchase cars and houses would increase but generally, the pay rise was targeted at the lower income group.
CIMB head of economic research Lee Heng Guie said there would be little boost to domestic demand as the salary increase would mitigate rising costs among the lower income group.
“Over the years, the price hike in petrol and toll has shaved a lot of disposable income, so this increase will help offset the higher cost of living,” he said.
Lee said there was always immediate concern on inflation as traders may take the opportunity to raise prices. However, based on historical data, there had not been a significant pull on inflation.
“The Government should take action to curb price increase,” he added.

tunku : who can save 40% of their income as saving? only those rich people,may be earning more than 10k monthly,not the lower income group.take example the middle income group with 4 children with a salary of 5k a month, car loan 800, housing loan 1500,utilities bill 500,children tuition 400, petrol/vehicle maintenance 500, balance 1300(food).Then what is left? the price of goods nowadays is really killing us.government should really look into these details that are the major concern of majority malaysian. it's good that government had increased the salary of their staff but when you look at the side effect, it's just the same, the increase salary is to cover up for the increase price of goods.the unfortunate people will be from the private sector,whose salary remain the same.