Saturday August 11, 2012
Production output figures indicate challenging times ahead
By FINTAN NG
BANK Negara will be releasing data for gross domestic product (GDP) in the second quarter ended June 30 next Wednesday and indications are that growth may prove to be more resilient than sentiments show. First quarter GDP came in at 4.7%.
However, the picture for the third quarter may not be as bright because economic indicators such as purchasing managers indices of Malaysia's major trade partners have dipped below the 50-level, showing that consumption has slumped as recession in the eurozone together with tepid growth and high unemployment in the United States hit sentiments.
Affin Investment Bank Bhd chief economist Alan Tan tells StarBizWeek that second quarter GDP may come in slightly better than expected (on a year-on-year comparison) on healthy exports and factory output for the quarter.
Exports for June, which came in at 5.4% year-on-year, was above expectations after a 6.7% surge in May. However, factory output as measured by the Industrial Production Index for the same month, which came in at 3.7%, was below expectations and although still resilient, may be a harbinger of challenging times for the manufacturing sector.
“It will be above 4% but the third quarter will be weaker at 3.8% as uncertainties stemming from bickering politicians in the US and eurozone already impacting demand with exports from Taiwan and South Korea having taken a hit,” Tan says, adding that GDP for the first half will likely be in the range of 4% to 4.5%.
He says while the house is maintaining GDP growth at 4% for the year and 5% for next year, the third quarter's GDP will be the weakest for the year and that uncertainty will drag into the first half of next year.
“There are downside risks to the 2013 assumptions because of the US fiscal cliff (tax increases and spending cuts going into 2013 which may drag growth lower) and the eurozone sovereign and banking crisis,” Tan says.
He adds that private consumption and private investment will continue to offset the slowdown in exports.
Meanwhile, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain says growth is likely to come in at 4.5% , which will put the first half growth in the 4.3% to 4.5% range.
He sees economic growth coming under pressure moving forward. “The second quarter's exports may have given the false impression that the worst is over (with two months of respectable export growth) but this may not be the case as external demand is unsustainable due to all the uncertainties,” Manokaran says.
He says exports and factory output for the third quarter will give an indication on the performance of third quarter GDP. “Weaker than expected data will show up in weaker GDP,” Manokaran says.
Maybank Investment Bank Bhd chief economist Suhaimi Ilias says Malaysia's second quarter growth will be about the same as the previous quarter. “It'll be pretty stable, which is what we're seeing for the rest of Asean as domestic demand remains the mainstay of these economies,” he says.
Indonesia, which released second quarter GDP data in the beginning of the week, saw growth rise unexpectedly to 6.4% compared to a 6.1% forecast. Thailand, scheduled to release second quarter GDP data on Aug 20, is also likely to see respectable growth albeit from a low-base as its economy recovers from devastating floods late last year while economists have forecast growth to accelerate to 7% in the Philippines after a 6.4% expansion in the first quarter.
According to the Asian Development Bank (ADB) in its July update, while the weaker global environment is expected to affect growth in South-East Asia, domestic demand and reconstruction activities should keep growth robust.
“A strong rebound in Thailand, healthy growth in the Philippines, and increasing consumer demand in Indonesia have helped the sub-region, and most governments have sufficient policy space to ease monetary policy and provide fiscal stimulus if needed. South-East Asia's economies are expected to post growth of 5.2% in 2012 and 5.6% in 2013, virtually unchanged from predictions made in April,” it says.
This is despite a revision downwards of growth for Asia. The ADB predicts developing Asia will expand by 6.6% in 2012 and 7.1% in 2013, lower than the 6.9% and 7.3% forecast in its Asian Development Outlook published in April.
Suhaimi says the key point is that there is room for policy, whether via monetary, fiscal or other measures, to support growth. “In Malaysia, fiscal measures have provided most of the stimulus as Bank Negara holds back from monetary easing,” he says.
Suhaimi adds that Economic Transformation Programme-related projects as well as cash handouts have so far supported domestic demand. “We've quite a lot on our plate with all the infrastructure projects, oil and gas developments and other big-ticket investments,” he adds.
Suhaimi says in a report dated Aug 8 that International Trade and Industry Minister Datuk Seri Mustapa Mohamed is turning cautious and less sanguine on the economy compared to the beginning of the year.
Quoting Mustapa, he says foreign direct investment (FDI) was “OK but not outstanding” in the first half of the year while the FDI outlook for the second half is “less sure” due to the global economic volatility and uncertainty as well as intensifying competition for FDI.
Suhaimi says the assessment now is that the second-half is going to be a challenging period after a decent first-half, which is a reversal from the view in the beginning of the year that economic conditions and growth will be better in the second half compared to the first half.
“The official real GDP and external trade growth forecasts, however, remain at 4% to 5% and 5% to 6% respectively. Our economic and trade growth forecasts are 4.4% and 6.5% respectively,” he says.
Suhaimi says central bank officials indicated in an earlier meeting which included the Finance Ministry that there is a possibility for 2012 real GDP growth to come in between 4% and 4.5% of the official forecast range (of 4%-5%) should US growth continue to be below average, mild recession in Europe, soft landing for China's economy and knock-on effects to regional economies' exports.
Nevertheless, experts believe that the country's economic resilience may increasingly come under pressure as the continued weakness in external demand impacts the exports-reliant manufacturing sector, thereby affecting domestic consumption and the services sector as sentiments take a hit.
The Malaysian Institute of Economic Research (Mier) says in a mid-July update that consumer sentiments was marginally higher at 114.9 points for the second quarter when compared to the first quarter's 114.3 points.
“The pertinent question here is whether this is a signal that consumer confidence is currently exhibiting signs of struggling optimism,” it says, pointing out that some private consumption indicators are already showing signs of slower growth in the coming months.
It says the services sector is expected to continue playing an important role in driving the economy but recent data suggests that there is a distinct possibility that the sector may slow down going forward as it has at the global level.
“Manufacturing will also likely expand slower in the coming months. The results of the second quarter Mier Business Conditions Survey, which covers the manufacturing sector, indicated a slower expanding manufacturing sector. The second quarter Business Conditions Index had fallen 5 points quarter-on-quarter to 111.5 points,” it adds.
It says four other sectoral surveys came in mixed with the auto and retail trade indices rebounding by 40 points and 34.1 points respectively to 120 points and 119.4 points. However, the residential property and tourism market indices settled lower.