Business

Saturday July 25, 2009

Economy on the mend

By CECILIA KOK


COULD this be the light at the end of the tunnel? The world’s leading economic indicators have been showing steady improvements over the past four months, albeit from severely depressed levels.

Consider this: It was about 10 months ago when the global economy was thought to be on the brink of the abyss, as stock markets worldwide crashed and all major economic indicators began falling off the cliff. Panic and worry were the order of the day then, as the global economy was struggling to find a bottom to land.

Well, the bottom was apparently found sometime early this year. The economic numbers of most countries bouncing back from their troughs were an indication of that.

In general, the moods in most countries have turned increasingly bullish over the past few months, as evident in the performance of their equity markets. The euphoria is not because the global economy is already out of the woods, but because it has “walked some distance away from the abyss”, quoting US President Barack Obama’s top economist Larry Summers.

In its latest estimate, the International Monetary Fund (IMF) suggested that the world’s gross domestic product (GDP) would contract by an average of 1.4% this year, before returning to moderate growth of 2.5% in 2010.

It is noteworthy, however, that the IMF pegs 3% as the differentiation line between global growth and global recession.

Shape of things to come

Economists believe that the massive fiscal stimulus spending would kick in more effectively and efficiently worldwide in the second half of this year, and strengthen the global economic recovery story, which they expect to be of a U-shape.

The prospects for developing economies seem to be relatively better than industrialised economies such as the United States, Japan, Britain and the Euro zone.

Take China. Working its way through the country’s economy is its massive stimulus package worth four trillion yuan, which resulted in a better-than-expected growth of 7.9% year-on-year (y-o-y) in the second quarter. Economists believe China will return to its rapid-growth track of 8% to 9% this year, and 10% next year.

Even Singapore managed to pull a surprise, when its GDP growth jumped 20.4% sequentially in the second quarter from the first, thanks mainly to its drugs sector.

As for Malaysia, its GDP is only expected to return to the growth territory, but at a tepid rate, in the fourth quarter of the year. For the whole of 2009, however, Malaysia’s GDP is expected to contract by 4% to 5%, according to official estimates.

In line with the official estimates, the Malaysian Institute of Economic Research (Mier) recently said it expected the country’s GDP for 2009 to contract 4.2%, before returning to a growth of 2.8% in 2010.

Private research houses’ estimates are more upbeat, as they expect Malaysia’s 2009 GDP to contract by only 2% to 3.5%, before growing again by around 3% to 4.5% the following year.

CIMB Investment Bank Bhd chief economist Lee Heng Guei says: “If you take the quarterly view, the recovery path for Malaysia looks like a U-shape. But if you take the annual view, it is a shallow V-shape.”

“Nevertheless, it is not the shape of the recovery that counts. Rather, it is the strength of the recovery. Recovery has to be strong and sustainable,” Lee adds.

Growth rates aside, Maybank Investment Bank Bhd (MIBB) chief economist Suhaimi Ilias expects the value of Malaysia’s GDP in 2010 to be about the same as in 2008, that is, RM528bil, compared with the expected RM507bil for 2009.

“On a quarterly basis, the value of Malaysia’s GDP is not expected to return to the peak of RM136bil that it recorded in the third quarter of 2008 until the final quarter of 2010,” Suhaimi explains.

What are the catalysts?

Malaysia’s economic recovery is mainly supported by the Government’s fiscal stimulus packages, whereby spending is expected to gather momentum towards the fourth quarter of this year.

As of June 26, only RM2.3bil, or 34%, of the first stimulus package worth RM7bil had been spent. As for the second stimulus plan, under which RM15bil are allocated for government spending, only RM1.6bil, or 11%, had been spent.

Sectors that are the main beneficiaries of government spending, such as construction and building materials, are expected to drive growth. Such spending is also expected to have a multiplier effect on domestic consumption and the manufacturing sector.

Meanwhile, the lagged effect of lowered interest rates is also expected to support the country’s economic recovery. To recap, Bank Negara has cut the overnight policy rate (OPR) three times by a total of 150 basis points between November last year and February this year. The OPR is currently at 2%, with the next review to be held by the end of this month.

Additionally, the recent recovery of the local equity market is expected to have a positive effect on the wealth of consumers. Hence, domestic consumption is seen to rise in the months ahead. This view is supported by the improvement of consumer confidence.

The consumer sentiment index, measured by Mier, rebounded from a negative territory of 78.9 points in the first quarter to the positive region of 105.8 points in the second quarter of this year. The index is a good indication of consumer spending trends for the short term.

Similarly, the business confidence index for the second quarter of this year has also entered the positive region by scoring 105.2 points, compared with 61.1 points in the previous quarter. The index is used to assess the short-term outlook for the manufacturing sector in Malaysia.

According to the Department of Statistics, Malaysia industrial production index (IPI), which represents close to 40% of its total economy, contracted by a smaller magnitude of 11.1% y-o-y in May, compared with 11.7% y-o-y in April and 12.7% y-o-y in March.

On a month-on-month (m-o-m) basis, the improvement in May’s IPI was evident across the board, with manufacturing output improving for three consecutive months. Manufacturing output, which covers 71% of total IPI, fell by 15.2% y-o-y in May, an improvement from a 16.1% y-o-y decline in April and 15.2% decline in March.

After a heavy drawdown of inventories between the fourth quarter of last year and the first quarter of this year, manufacturers have started increasing their production gradually in anticipation of higher demand from domestic and foreign markets.

Global demand for electrical and electronic (E&E) goods are expected to improve in the months ahead, and this would translate into improvements in the demand for E&E products from Malaysia. Global semiconductor sales have been showing sequential monthly increases, rising 5.4% m-o-m from US$15.6bil in April to US$16.5bil in May.

AmResearch Sdn Bhd senior economist Manokaran Mottain says the E&E sector is still vital for Malaysia’s economy because it is the core of country’s manufacturing activities.

Manokaran also views positively the recovery of commodity prices, such as that for crude oil and crude palm oil, as a boost to Malaysia’s economy.

On whether he agrees that the rebound of crude oil prices could actually derail our recovery path, Manokaran explains that as long as the rebound is driven by demand in tandem with economic growth, “then it is ok”.

“It will only cause havoc if the oil prices are driven by mere speculation,” he adds.

Roadblocks to recovery

While almost everyone now is singing the tune of “the worst is over”, the question remains whether the economic rebound is sustainable. As it is, the current rebound in most economic indicators is driven mainly by short to medium term initiatives such as inventory re-stocking and the execution of fiscal stimulus plans.

There are risks of the global economy slowing down again in the second half of next year as governments reverse their expansionary fiscal and monetary policies.

Affin Investment Bank economist Alan Tan says the Malaysian economy will take a setback if the anticipated global economic recovery fails to materialise.

Suhaimi of MIBB concurs, saying that trade is still crucial to the country’s economy, as many local businesses in the services sector have linkages to international trade activities.

For May, Malaysia’s gross exports fell 29.7% y-o-y, but rose 4.5% m-o-m, while gross imports fell 27.8% y-o-y and 2.3% m-o-m. The country’s trade surplus for May widened to RM10bil from RM7.4bil in April.

Economists say there are risks stemming from a sluggish US consumerism, as unemployment in the country remains high and rising, and the recent wealth destruction has prompted households there to save more. Traditionally, US consumers have been the main driver of the world’s GDP.

Suhaimi believes it is not realistic to count on China to save the day, as its economy is mainly driven by external demand, while private consumption accounts for only 35% of its GDP.

Furthermore, Malaysia’s exports to China mainly comprise intermediate goods such as E&E for export-based manufacturers there. Real recovery in the final demand for China’s exports is still necessary for countries to piggyback on China’s upturn.

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